Long-term interest rates that remain elevated for an extended period tend to confer advantages upon larger corporations compared to their smaller counterparts across various aspects.

The era of ultra-low interest rates has passed, and the Federal Reserve may begin to gradually reduce its key interest rate from a 23-year high, albeit less aggressively than market expectations. While high interest rates impact companies of all sizes, smaller firms are particularly vulnerable compared to larger corporations, which are better equipped to withstand the challenges.

In contrast to the low-rate environment during the early days of the Covid-19 pandemic, where the Fed aggressively cut rates to stimulate the economy, the current situation sees rates at a range of 5.25-5.5%, reflecting a period of “easy money” for consumers and businesses. With inflation slowing and the economy holding steady, the Fed lacks immediate motivation to further reduce rates.

The Federal Reserve’s mandate includes stabilizing prices and maximizing employment, prompting rate cuts during rising unemployment or when inflation falls below the 2% target.

Lauren Goodwin, Economist and Chief Market Strategist at New York Life Investments, sheds light on the effects of higher-for-longer rates on companies, emphasizing that larger firms tend to fare better in challenging economic climates due to their larger capital reserves and regulatory protections. Conversely, smaller companies thrive when economic growth accelerates, benefiting from a risk-on investor sentiment.

Regarding mergers and acquisitions (M&A), the prevailing high-interest-rate environment has slowed activity. While there may be opportunities for larger companies to acquire smaller ones, Goodwin suggests that economic slowdowns could dampen M&A activity despite potentially lower interest rates.

Looking ahead, while the market anticipates modest interest rate cuts by the Fed, economic growth slowdowns could impact M&A activity despite the availability of cheaper capital. Thus, the M&A landscape remains contingent on economic conditions and the Fed’s policy decisions.

Gasoline prices are increasing rapidly.

Gasoline prices are surging across the nation, with the national average increasing by 11 cents in just the past week, reaching $3.28 per gallon, as reported by my colleague Matt Egan. This surge brings prices to their highest level in nearly three months, presenting a challenge for millions of Americans hitting the roads during the Presidents’ Day weekend.

While some increase in prices is typical as winter ends due to heightened demand and the transition to more expensive summer fuel, abnormal factors are also at play. Refinery outages, including a prolonged shutdown of the largest refinery in the Midwest, are restricting gasoline supply.

Regardless of the causes, escalating gasoline prices are unwelcome news for consumers already grappling with the high cost of living. Additionally, this trend poses challenges for policymakers in Washington, particularly if it continues to intensify. Rising gas prices complicate the Federal Reserve’s efforts to combat inflation and undermine the messaging of the White House during an election year, which previously touted low gas prices as evidence of economic success.

As prices climb higher, the ramifications become more significant. Patrick De Haan, head of petroleum analysis at GasBuddy, emphasized the sensitivity of the issue for Americans and suggested that the White House may have limited influence over market dynamics, as the market ultimately dictates price movements.

Up Next

Monday: US markets are shut for Presidents’ Day.

Tuesday: HSBC, Walmart, Home Depot, Barclays, Caesars Entertainment, and Dillard’s announce earnings.

Wednesday: Nvidia, Rivian, Fidelity, Marathon, Etsy, Wingstop, and Marriott report earnings. The Federal Reserve publishes minutes from its January policymaking meeting. Fed officials Raphael Bostic and Michelle Bowman give speeches.

Thursday: Intuit, Pacific Gas & Electric, Live Nation, and Wayfair announce earnings. S&P Global releases February business surveys on US economic activity. The Chicago Fed releases its National Activity Index for January. The US Labor Department reports on new jobless claims for the week ending February 17. The National Association of Realtors publishes existing-home sales data for January. Fed officials Philip Jefferson, Patrick Harker, Lisa Cook, Neel Kashkari, and Christopher Waller deliver speeches.

Friday: Warner Bros. Discovery and Icahn Enterprises report earnings.