A Measure of Reality

Dr. Bernanke and the FOMC announced their interest rate projection yesterday. It deserves a few comments.

The fact that the FOMC is expecting to keep interest rates essentially flat well into 2014 means that they expect unemployment to remain high, inflation to remain quiet, and the economy to remain troubled for that long. We are expecting a better 2012 than the Federal Reserve Board seems to be anticipating.

We believe that this decision will hurt the lending environment.

I have not talked to a single banker who would not lend more if interest rates were higher. Many would-be borrowers would have access to capital if bankers received a greater risk-reward relationship. Low rates incent the borrower but do nothing to incent the lender to take risks.

Please take a look at the chart. It is encouraging to note that there are some members of the FOMC with a good grasp of reality in that they would prefer higher rates as early as this year. More would like to see rates going up in 2013.

 

These are reasonable interest rate expectations given the anticipated inflationary pressures. It's encouraging to see that some members of the committee have a good grasp on reality.

It is always unwise to bet against the Federal Reserve Board. Expect low rates to extend through at least mid-2013, which means you don't have to run out and borrow right now to lock in low rates.

However, our economic forecast suggests that you should invest in your firm now in order to maximize your growth potential over the next 18 months and to prepare yourself for 2014.

Invest in efficiencies, training, customer satisfaction efforts, new products and new marketing efforts.