Stop Worrying About Higher Interest Rates

Farrell, C. (2010). Stop worrying about higher interest rates. Retrieved April 9, 2010 from: http://www.businessweek.com/investor/content/apr2010/pi2010049_796113.htm

This article is published on the businessweek.com Web site and states that interest rates are on the upswing but this fact is not necessarily a reason for worry. Rising rate could be good or bad news depending of what is driving the increase. Traditionally, two major components were the driver of rates: the expected rate of inflation and the expected real rate return on Treasuries. The author states there is now a third factor and that is the risk of government default. However, default risk in the U.S. is really the same as inflation because the U.S. will just print new money, if needed, to pay the government’s debt, and this leads to higher inflation. The author also states that investors are not generally worried about inflation right now because the core rate of inflation has averaged 1.3% over the past 12 month. Farrell sees the rate increase as a positive sign because the yield is sending an optimistic signal to investors because they see it as a sign that the economy is recovering, which makes them more comfortable in making investments in securities or into a business. Higher rates can be a negative in the long run because they increase the cost of borrowing, which could lead to lower profits for the firm but right now the higher rates are seen as a positive sign that recovery is on the horizon. This article discusses an important subject that manager should understand because if the signs of recovery are true, managers need to have their firm ready for the potential increase in business. Managers should also know the drivers of interest rates so they can decide if the increase should be seen as a positive or negative business force.