Right now, there is one thing the whole world is watching and that thing is called interest rates. Since the Federal Reserve controls rates in the U.S., investors scrupulously pore over Fed announcements for any hint about rate increases. This year hasn’t been different, with analysts speculating on rate increases later in 2015. So why all the fuss?
Well, rates affect a lot of things, including capital expenditures used to grow businesses. For instance, if you have a lemonade stand and want to borrow $100 from your neighbor to buy more lemons, how much of a return would your neighbor want on his investment? The answer is he wants the most he can get, but in today’s low rate environment he won’t get much. The flip side is that you won’t have to pay much to borrow the $100, so the extra money you save from low borrowing costs could be used to hire another worker to sell lemonade. This scenario is one of the reasons why rates are kept low; to give companies incentive to borrow and expand their businesses, therefore creating jobs and keeping inflation levels within target.
So what happens when borrowing becomes expensive? Companies spend less on expansion, prices fall and jobs get cut. Shareholders anticipate declining profits due to lower prices of goods and sell their company shares, which in turn pushes market prices down. Overall, economic activity slows and everyone faces more economic challenges. This is why the Federal Reserve is overly cautious on timing rate increases. If it’s not done at a time when the economy is strong and can handle it, the Fed runs the risk of straining the economy more than it would like to.
clearTREND research produced by our firm in Appleton indicates upward trends in most U.S. stocks as well as most U.S. sectors. U.S. energy has been trending downward. Our U.S. Economic Health Index shows that 67 percent of U.S. sectors are expanding while 17 percent are contracting.
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