More than 150 years ago, the French writer Jean-Baptiste Alphonse Karr coined a phrase that remains current to this very day: The more things change, the more they stay the same.
This well-worn observation came to mind recently when the new Federal Reserve chairman, Jerome H. Powell, opened a speech with the aging words of one of his predecessors, Alan Greenspan. And not for a reason that you might expect, but one that you, as a business person and investor, need to understand at this interesting point in our financial history.
Powell quoted Greenspan’s 2003 quip that “uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.”
Despite the passage of 15 very eventful years, featuring the collapse of the U.S. housing market and the ensuing Great Recession among other unexpected developments, Greenspan’s remark seems every bit as applicable, relevant, and enduring as the day he uttered it.
The more things change. …
Well, before you complete the saying, I have news to break with big implications for your business and portfolio: Things aren’t the same as they ever were, to borrow a phrase from the great singer David Byrne, the pride of Arbutus, Maryland, and The Talking Heads.
Things have actually never been more different monetarily, at least not for several millennia.
Interest rates have never been lower. In history. Three thousand years of it.
That’s an astonishing number that’s neither a fabrication nor an embellishment. That’s a fact, according to Dr. Richard Sylla, professor emeritus of economics at New York University’s Stern School of Business and the author of “A History of Interest Rates.”
Sylla says they are “the lowest in history, from the Code of Hammurabi to Babylon Civilization, Greek and Roman Civilization, the Middle Ages, Renaissance, right up until the present.”
That’s obviously a fascinating historical circumstance, and I encourage you to contemplate and read more about it. But like you, I’m in business. I need to know what this information means for me and my clients right now and what to do with it right this minute.
A little analysis
OK, let’s start with the most basic statistical analysis. The odds that interest rates will go lower are infinitesimal; the odds that they will remain constant are not much better. In other words, interest rates are headed higher at some point not too distant, although Powell is a cautious, careful custodian of our economy.
In the speech he launched with the Greenspan quote, Powell delves thoughtfully into the employment and inflation rates. It is true, unemployment is remarkably low and inflation has heated up, but not too much in his estimation. The Fed has traditionally liked 2 percent, and that’s where we are. “(We) have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating,” Powell said.
But change is coming. No doubt. It’s easy to forget given how long we’ve had to enjoy GDP growth, stock market appreciation, and ever-better employment numbers. However, every party has to end. You need a plan for getting home safely.
Here are some things to keep in mind.
One, and most obviously, interest rate increases make the cost of money more expensive. Where is your business? Where are you? If borrowing makes sense, do you want to do it now, when it costs less than in 3,000 years, or later?
This is particularly true for companies. Most business lending is done on a variable rate basis and thus will make borrowing more expensive as rates rise.
Two: Depending on what your business sells, a higher cost of money will eventually be seen in higher prices for products and services. Supply and demand tells us that with an increase in the price of a good or service, an inverse response can be expected in demand.
The cost of production will also likely tick upward as the labor market grows tighter. What’s more, immigration policies are shrinking the availability of quality people. I’ll leave the politics to others, but there’s no question a 3-something unemployment rate is great for working families, but tough on profit margins. Sellers will need to rely more on creating differentiation to better compete.
These factors, when combined together, should have business executives really focused on their plans for the months ahead.
The more things change, the more they stay the same. Interest rates will rise just as certainly as the sun will tomorrow. Prepare for it.
Christopher Helmrath is the managing director of SC&H Capital, the investment banking and advisory practice of SC&H, headquartered in Sparks.