While lower interest rates could help investors in the short term, one activist investor says this move could be disastrous to the U.S. economy.
The Federal Reserve Board, led by Obama appointee Janet Yellen, has not deviated from its stance of keeping interest rates at a record low until the time is absolutely right, continuing the policies of former Fed Chairman Ben Bernanke. The argument the board’s report puts forward is that increasing the interest rate may have an adverse impact in the United States considering the fragile global economy and create a drag on inflation to the point of stagnation, or worse. All of these, the Fed argues, could slow the already limping economy, meaning there is no reason to increase the interest rate until the global economy shows signs of stability.
Investors will be affected both directly and indirectly by the Fed’s decision. Firstly, stock prices will not be affected by interest rate increases. As we have seen recently, the markets had little lasting change with the Fed’s announcement. An increase would likely drive the markets down further than it already has on news from China and Europe. Generally speaking, interest rate increases tend to pull stock prices down since companies often tend to cut back on spending. This shows that Yellen and the rest of the Board sought to create some stability in the volatile markets, which we’ve seen with the Dow’s fluctuations no longer as drastic as the early September swings that marked the start of fall.
Because prices are affected by external variables beyond the Fed, there is no guarantee we are not in for a long-term fall. China’s continued economic struggles – which is not as surprising as much as China admitting there are problems in its economy – as well as the weakness of the European economy has been tabbed as the catalyst behind the Dow’s 1500-point drop since late August. The Fed’s move just means the current situation will not worsen off of rate increases.
For fixed-income investors who invest in government bonds and treasury bills, the decision not to increase interest rates means these instruments will continue to be safer alternatives to stock investments; although offering lower returns for investors.
Not everyone agrees with the Fed’s move, however, and their opinions are that the Fed holding on interest rates could prove disastrous for the U.S. economy.