It seems to be a forgone conclusion that the Federal Reserve will increase interest rates at their upcoming meeting. For years the Fed has repeatedly stated that they will likely raise rates in 2015. Now that December is upon us it appears the day of reckoning has arrived.
There is always a lot of consternation around rate changes, and this time around is no different. Effectively the Fed controls the price of money (interest rates) in an attempt to influence economic activity. The Fed lowers rates to spur economic activity and raises rates to slow it down. So a rate increase should be perceived as a generally positive event, an indication that economic activity is increasing.
But many express concern over a rate increase. If you are looking to finance the purchase of a house or a car you may not be excited about the prospect of a rate increase. If you have a variable rate loan or line of credit you similarly may not be excited about a rate increase. If you are a lender you may not be excited about a rate increase either. If you agree to lend money to someone for 7 or 10 years at a low fixed rate, a rate increase effectively erodes your return.
Many are also concerned about the impact a rate increase has on asset values. Asset values often have an inverse relationship to rates. For example, consider a house. All things equal, a house will sell for a higher price when interest rates are low and a lower price when interest rates are high. Assuming you are like most and finance the purchase of a house, the monthly payment for the same “house” will be lower in a low rate environment. You can buy “more house” on the same monthly budget. But so can everyone else, and the prices of the entire housing market is bid up in a low rate environment.
Some of what we have seen in the past years in the financial markets is a result of the above situation. Asset values have been bid up in stock, bond, commodity, and real estate markets as a result of affordable and accessible capital. Many businesses have also taken advantage of cheap and easy money to expand through acquisitions. 2015 was a record breaking year for M&A across the world and a very active year specifically in collision repair.
