The day was speculated to be June 2015. Now, it has been pushed back to September 2015, potentially. If the US economy continues to be weak for Q2, rest assured that the date would be delayed further. Yes, we are talking about the Federal Reserve raising interest rates once the US economy recovers strongly. The reason fro interest rate being raised is because they fear inflation should the economy move up strongly and interest rates remain too low, thus speculative activities may happen. Well, if they (Federal Reserve) would listen to Warren Buffett, this may have to be pushed back as well. This famous stock guru said that if the interest rates are adjusted upwards, then current stock prices would seem expensive.
Let me explain very briefly. When interest rates are high and perhaps higher than the growth of business for stocks, as an investor of course I would put my money into the Fixed Deposit. It’s also safer. However, when interest rate is very low, lower than even inflation rate and the stocks are showing a higher return than fixed deposits, of course I would have to think of other places to invest and perhaps I may buy stocks instead. This action of buying more stocks would definitely push up the stock price and once stock price is up, the returns in percentage terms would reduce and the interest rates for Fixed Deposit may appear attractive again.
In other words, Warren Buffett wanted to remind the Federal Reserve that the companies are still not performing very strongly. Thus, any interest rate adjustment upwards would be against the stock market currently.
Currently, both the Wall Street and many European stock markets are at an all-round high. The Federal Reserve is evaluating when should they raise interest rates from the current near zero levels and this decision hinges on the strength of the US economy. According to Buffett, US% will continue to serve as the world’s reserve currency 50 years from now. In the US, income inequality issue has become a major issue in the 2016 Presidential election, with both the contenders trying to woo the middle-class with this issue.
The decision does play an important part because US$ is the world currency. Thus, if interest rates were to be raised, it will cause all the currencies to weaken due to the strengthening of the US$. Yet, if it does not, its growth may be hampered by inflation growth as well which in the end meant little even if the economy is growing. Buffett is an influential person. We just have to see how much his influence is with this latest announcement.
written on 4 May 2015
Next suggested article: US$1 to RM4 soon, rate hike by US Federal Reserve