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