| Three economists go hunting and come across a | | | | rate influences all other short term rates, from |
| large deer. The first economist fires and misses three | | | | Treasury Bills, to Money Market Funds, to short term |
| feet to the right. The second fires and misses three | | | | bank deposits, to everything else. All other short |
| feet to the left. The third doesn't fire, but shouts out | | | | term rates are set by the markets, but if they start |
| with great excitement, "we got him, we got him!"You | | | | to move very far away from where they should be, |
| need to borrow and your lender gives you a choice | | | | arbitragers come into the picture to drive them back |
| between a fixed rate and a variable rate loan. Which | | | | into line. The bottom line - and the one thing to |
| do you choose? Or, you have excess funds that you | | | | watch - is the Fed Funds Rate; nothing else matters, |
| don't need for a while. Do you buy a fixed rate | | | | as far as short term interest rates are |
| government note, or put the money in your business' | | | | concerned.Long term rates, on the other hand, are |
| money market fund? This should simplify things for | | | | not directly influenced by the Federal Reserve and |
| you and give you what you need - without firing two | | | | are much more dependent on supply and demand |
| shots and thinking that, on average, you hit the | | | | factors and the overall direction of the financial |
| mark.When you finish reading this in ten minutes, or | | | | markets. Supply and demand can, and often does, |
| so, you're not going to be an interest rate guru. | | | | extend across financial markets. For example, if |
| Leave that to the economists, the bankers and the | | | | investment in the stock market is weak, those funds |
| other self-proclaimed experts who try to make a | | | | need to go somewhere and may end up in the bond |
| living predicting what interest rates will do next. But, | | | | market; this means that demand for bonds increases |
| you will have enough of an understanding to | | | | and this can push long term rates higher. Or, financial |
| directionally forecast where interest rates are likely | | | | traders may believe that inflation will increase down |
| to be headed, why, how your small business might | | | | the road and push long term interest rates higher as |
| be affected, and what you should be doing to | | | | a result. Or, speculators may come into the market |
| protect your company.A lot of the confusion and | | | | and, at least for short periods of time, push long |
| mystery about interest rates stems from inaccurate | | | | term rates significantly in one direction, or another. |
| and sometimes misleading statements in the press - | | | | The point to remember is that collective factors in |
| because too many financial writers don't know much | | | | the financial markets are responsible for movements |
| more about interest rates than you do. They tell us | | | | in long term rates and, while the Federal Reserve can |
| that "rates" are moving higher - well, which rates? | | | | influence long term rates by moving short term rates |
| They tell us that the President, or congress, or the | | | | up, or down, it doesn't set them directly and it is |
| Federal Reserve Chairman is "responsible" for rates | | | | sometime frustrated because the markets |
| going up. They say that the Federal Reserve is trying | | | | "over-ride"" their intentions.That's enough Economics |
| to push "mortgage rates" higher. They imply that | | | | 101. Here are some interest rate rules of thumb that |
| banks are "gouging" customers with high loan rates | | | | can help your small business. Our economy tends to |
| and are "miserly" with the rates they pay on | | | | continuously repeat cycles of growing for several |
| deposits. So, let's try to get enough things straight to | | | | years and then slipping into recession for a year or |
| take the mystery out of this.Stop thinking about | | | | two. In the early stages of an economic recovery, |
| what "rates" are, where "rates" are heading, and how | | | | both short term and long term interest rates stay |
| "rates" are going to affect your business. There are | | | | low; as growth continues, however, short term rates |
| not "rates" - there are short term rates (i.e. less than | | | | start to rise. Then in the middle of the recovery, |
| one year) and long term rates (you guessed it - | | | | there is often some modest movement in longer |
| more than one year) and it's important to | | | | term rates. Toward the end of an economic growth |
| differentiate between the two. Think about the | | | | cycle, the economy really heats up and both short |
| interest rates on government securities; you can buy | | | | term and long term rates rise further. In this "end |
| them with maturities that range anywhere from a | | | | game," however, short term rates are likely to move |
| few days to almost thirty years. The important | | | | up much more quickly and, at times, actually be |
| things to understand are that, while short term and | | | | higher than long term rates. Finally, as the economy |
| long term rates move in the same general direction | | | | collapses, all interest rates start to fall, but short term |
| over long periods of time, they don't change at the | | | | rates normally fall faster and further than long term |
| same speed, they often don't change by the same | | | | rates.This is, of course, a generalization, but what |
| amount, and, sometimes, they can actually move in | | | | does it mean and how do you take advantage of it? |
| opposite directions.The level of short term rates is | | | | Just follow the likely interest rate trend. If you are |
| primarily a function of what the Federal Reserve - | | | | borrowing at the beginning of an economic recovery, |
| the country's central bank - wants them to be. The | | | | get a long term rate - at the end of the recovery, a |
| Fed controls short term rates by reviewing and | | | | short term rate might be better. If you're saving, it's |
| setting the Fed Funds rate every few weeks. The | | | | just the opposite - use a short term rate at the |
| Fed Funds rate is the rate at which U.S. banks lend to | | | | beginning of a recovery and a long term rate toward |
| each other, when some banks have excess funds | | | | the end.Jim Deyo is the President of Business Advisor |
| and others need to borrow them to balance their | | | | Online ( an information service for small businesses. |
| books at the end of each day. (These "loans" | | | | As a former Sr. Vice President with a major banking |
| between large banks usually expire the next day and | | | | institution, he worked extensively with small and |
| have to be renegotiated.) So, the Fed Funds rate is | | | | medium sized businesses and has over 30 years |
| what the Fed says it is; they set the rate where | | | | experience in commercial and consumer lending, |
| they want it to be and change it by whatever | | | | accounting, finance, marketing, and strategic planning. |
| amount they want.Then the level of the Fed Funds | | | | You can e-mail him at , or call him at (248) 563-7158. |