Interest rates affect every aspect of a business, from what you pay for credit, to what your customers are able to pay you to whether you employees think they are being paid fairly. Because interest rates ripple through every aspect of both a business & the overall economy monitoring them is one more thing to put on top of the plate of today’s business owner. Here is a brief review of our thoughts on rates now & where we see them going in the future.
The Fed long ago made the promise to: “take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” and clearly they took that promise seriously. Rates are at historic lows and the Fed has actively been a buyer of notes to try to maintain these low rates. Unfortunately this creates three problems: first is inflationary pressures pop up despite artificially low borrowing costs which means once rates return to normal market range serious inflation may occur stalling any economic upturn. Second banks get to borrow at such low rates that all they need to do is borrow (at an effective rate of around .5%) then buy treasuries (paying an net effective rate of around 3.5%) and then leverage up those treasuries to buy more treasuries and you can see how they can make plenty of profit without loaning any money into the private sector where the capital is needed. The third problem is overactive financial manipulation devalues currency which decreases profits from any overseas endeavors & creates an environment of uncertainty which puts meaningful investment and action on hold.
The thought that the Fed is “out of bullets” is incorrect, the Fed can by anything they want to promote their economic engineering and pretty much have a limitless account to make those purchases. The problem really is with the ripple effects, inflationary pressures creep in because many products are imported to the US & the dollar is decreasing in value thus the retailers get hit with exchange rate differentials which force them to raise prices to the consumer, banks have no desire to lend money into the small & medium sized businesses that really drive economic growth because the rates they can charge don’t properly offset the risks in comparison to simply buying treasuries and making loans to large companies (which is why unemployment stays high) and the uncertainty effects stalls activity from consumers to businesses.
The reality is sometime soon (and I am going to go out on a limb here & guess shortly after the election) rates will have to start moving up again as pressure from large multi-nationals whose profits are being eroded by a devaluing dollar hit Washington. It would be best if you can to take advantage of the current record low rates and refinance any commercial property and even recapitalize your other debt to get a nice cash flow savings ahead of any swing up in rates.