Businesses and the Fed
Do you ever wonder how much the board of directors of any major business frim spend thinking about the Fed and if/when they’ll hike rates? Probably slim to none.
Conversely, who much time do the financial news networks devote to what’s happening in Washington? If you said entirely too much, you’re correct.
Frankly put, business news should cover just that. Business. There are plenty of other outlets that can and do cover what’s happening within our government and others around the world. Nevertheless, as the years have passed, people have been conditioned to think what’s happening in government, i.e. the Fed, is more critical/important that what businesses and entrepreneurs are doing to advance the economy.
Sure, what the Fed does absolutely can have a bearing on the value of currency and this should be of a concern for companies around the world.
With some of the more recent rate lifts by the Fed lifted (December 2015) Japan and Europe moved into the negative rate zone, therefore weakening the dollar. Conventional wisdom went out the window with this reaction, as it was the opposite, yet predictable.
When interest rates go negative, people go into cash and in turn, slows money supply growth. When rates are higher in the United States, this speed up money supply growth rates due to banks lending more.
In addition, the hike in December was the first in American history that did not squeeze the reserves of banks. Currently, the U.S. has at least $2.25 trillion in excess bank reserves. Thankfully, as long as excess bank reserves continue, rate hikes won’t result in a tightening in monetary policy.
As a matter of fact, as long as the Fed leaves extra reserves in the banking system, it’s more likely that there will be an increase in inflationary pressure. At the same time, the longer other central banks attempt to manipulate their economies with negative interest rates, the more likely deflationary pressures will build.
In the first quarter of 2016, at annualized growth rates, the M2 measure of money in the US is up 6.6%, while commercial and industrial loans are up 19.3%. While not the best measure of the policy of the Fed, it does reflect that money is not tight.
The TV pundits can continue to rage on about the Fed lifting rates in a few weeks (June). It doesn’t really matter.
When it comes to Corporate America, the difference between a 0.5% and 0.75% federal funds rate doesn’t really matter much.
Frankly, if rates are higher, more money will probably be available. In truth, if the Fed really wanted to get tight with its policy, it would get rid of all excess reserves. But, we know this won’t likely happen.
Looking ahead, we are thinking there will be a symbolic hike in rates. And as people who invest, we should follow the lead of the Boards, not what we see from pundits and armchair quarterbacks.
After all, it is the entrepreneurial class that is the engine of economic activity, not the government.
* – All data and numbers courtesy Brian Westbury, http://bit.ly/24FZQy2.