By Professor Ricardo “Rick” Ulivi, Ph.D.
After many years, the Fed has raised interest rates just a quarter of a point. The real thing to watch for is the future trend of rates, and the consequences of this current increase.
Will rates continue to go up, or will they go down, again?
That’s the million dollar question, and the right answer will help you make money or avoid losing money. Here are some thoughts of mine.
The most likely first impact of the rise in interest rates is to increase the value of the dollar versus the currencies of the US’s main trading partners. That will continue to reduce our exports, because they will become more expensive, and increase imports, because they become cheaper. All this will make our grotesque trade deficit escalate even further from the current $500 billion a year. That’s bad news for manufacturing but good news for consumers because imports will be even cheaper. A stronger dollar should continue to reduce inflationary expectations, but result in fewer jobs in manufacturing.
Keep in mind too that most US large companies derive 50% or more of their sales overseas, and as the dollar appreciates, their repatriated profits sink in value. This means corporate profits should go down.
What happens if you add increased interest rates and lower profits?
If you add the effect of interest rates going up, and profits going down, you can expect a substantial drop in stock prices. This drop might encourage the Federal Reserve to reverse course, and drop interest rates once again. This might confuse the financial markets, and the value of the dollar may drop as a result. This, in turn, may increase the value of import prices and trigger inflation, which has been dormant. If inflation starts increasing, we are in real trouble. We will have low or no economic growth, and accelerating inflation. Do you want to see what this might look like? Google Brazil economic problems and you’ll get a feel for what might await us.
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Have a wonderful Holiday Season!