Interest Rates Rise? Be Prepared to Deal with the Ramifications

IF THERE IS one thing we’re not short of at the moment, it’s a surplus of money sloshing around in our financial system. Since 2008, central banks globally have been printing money and injecting cash into the marketplace at a rapid rate in order to keep demand for products at a healthy level.

The Federal Reserve has clearly stated that a plentiful supply of cheap money is here to stay and that interest rates won’t be increasing anytime soon as they attempt to restimulate the economy after the COVID-19 pandemic. The question is, do they get to make the final decision on this?

In recent weeks, we’ve seen rumors of inflation beginning to appear as many economies come out of self-imposed restrictions and demand for goods begins to return. Prices for many commodities used in the manufacturing process such as oil, copper and iron ore have begun to increase.

Inflation fears have a direct impact on interest rates — no one wants to earn a return that is less than the cost of money, even if it’s a safe investment — and one of the safest that has been caught in the crosshairs of inflation concerns is government bonds. Recently, the price of government bonds has begun to decline on the secondary market, which reflects investors wanting to earn a higher return (the lower the price of a bond, the higher the yield the investor earns in interest). This is bad news for central banks, as new bonds issued to raise funds will have to be priced at a higher interest rate to match the market price. If existing bonds start trading at, say, a 3 percent yield, then new bonds issued must be offered at a similar rate to meet the market, regardless of central banks’ desires to keep rates at, say, 2 percent. Central banks, in those circumstances, will be forced to increase interest rates whether they like it or not.

So far, the Federal Reserve is making soothing sounds that it has everything under control. Whether the market will test the limits of the Reserve remains to be seen. An increase in interest rates can present two problems for those in the jewelry industry: an increase in the cost of borrowing, and an increase in the price of the market’s favorite asset in times of inflation – gold.

What should a retailer do in the meantime?

1. Don’t panic or overreact.
2. Make sure you have a comprehensive financial plan. Speak to your CPA about your current debt, short-term and long-term financial goals.
3. Pay down your credit card debt. Credit card rates are generally tied to the prime rate, a national index used by banks to determine consumer interest rates, and therefore can move up or down.
4. Protect your cash. If interest rates do increase, you can take advantage of these increases by putting your money into certificates of deposit. Be careful not to lock up all your cash reserves. Consider using the ladder technique, which involves buying CDs with varying terms.
5. Most businesses who own mortgaged property will be on variable rates. You should speak to your bank to discuss options of possibly locking into an interest rate, especially while they’re still low.