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Despite rising material costs to companies and organizations, Tom Rankin of SVN/Rankin Co. and Rankin Development LLC says his industrial development projects haven’t slowed and business is robust.
“It seems like every business is having record sales. It’s really kind of a unique time,” he says, but notes some concern around the corner. “Because it’s so frothy, there’s so much activity with people having record sales, and that can’t continue long term. Something’s got to give.”
That may come by way of the Federal Reserve. Jason Flores, senior vice president and senior portfolio manager for Central Trust Co., a division of Central Bank, pays close attention to inflation, talk of raising interest rates, and what’s happening with national monetary policies. Raising interest rates can slow inflation a few ways, Flores says. If the cost of borrowing goes up, consumers and investors can afford to borrow less, whether for a car, house, goods or business capital. That slows demand, reducing prices. Increased rates also mean better earnings on savings, and conservative investments such as bonds, so people spend less and save more, reducing demand.
Fed Chair Jerome Powell has categorized today’s rate of inflation – currently more than 4% and on track to reach 5% – a transitory situation.
“We haven’t seen inflation like this in a couple of decades,” Flores says, adding he doesn’t think it’s transitory.
While the cost of commodities may rise and fall, rising wages are “sticky,” he says. You wouldn’t pay higher wages now and reduce those wages the following year.
In Powell’s remarks during an Oct. 22 virtual conference, he acknowledged inflation may linger because of pandemic-related supply chain constraints and slowing job gains. But raising rates too high or too fast could shock the market, Flores notes – like hitting the brakes on a speeding car. That’s why policymakers are careful, he says, not only about the rate but the pace of raising interest. According to its latest report, most federal policymakers expect interest rates to rise between 2022 and 2023. Powell has said the Fed’s first step will be to taper the purchases of Treasury bonds and mortgage-backed securities, currently at $120 billion a month.
Flores likens that action to taking one’s foot off the accelerator. Purchasing such a large number of bonds unnaturally suppresses interest rates. Rolling back purchases will ease that suppression.
What does this mean for businesses? Flores says interest rates won’t rise so much that people can’t afford financing or to get capital. Rates will still be relatively low by historical standards. But it will cost a bit more than it does now. Pay attention to adjustable-rate borrowing, he says, and consider locking in current fixed rates. Also expect a potential reduction in future consumer spending overall. Flores says real estate and mortgage businesses may feel it most, with a ripple effect felt by related businesses like furniture and appliance stores. However, the current supply issues are likely to keep prices historically elevated for the foreseeable future.
Predictions of rising interest don’t faze Rankin.
“It literally can’t go any lower so it’s going to go up,” he says. “I think other issues facing people today are much more center of mind. And that’s workforce issues, labor costs, supply chain issues – I don’t care what industry you’re talking about.”
Flores believes the most important pandemic-related economic influence may be changing behaviors, similar to shifts felt at the end of World War II and in the 1960s. A recent example is the 2008 financial crisis, after which people dramatically reduced debt and improved access to cash.
“Out of this one, it’s really, ‘Hey, what’s important to me in life?’” he says.
That means more people are renovating homes instead of moving. They aren’t willing to work grueling jobs for the same wages. And they are migrating to more secure careers.
“There’s a lot of cross-currents of change going on,” Flores says, “and cross-currents are hard to navigate. You’ve got a merging of political, economic and social behaviors that, in my opinion, is fairly unprecedented. The economic piece is just one part.”
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