Categories: Finance

The Interest Rate Hike Is Imminent. Are CEOs Prepared?

After intermittent economic cloudiness in November, the most recent U.S. employment report seems to have given the Federal Reserve a sunny signal to go ahead and bump rates after the it declined to do so in September. Payrolls increased by 211,000 people following a gain of 298,000 in October that was bigger than previously estimated, easing concerns that had been raised by American manufacturers’ less-than-stellar recent pace of activity.

“It was a broad-based [jobs] gain across all sectors, and that’s absolutely essential,” John Silvia, chief economist at Wells Fargo Securities, told Bloomberg. The jobs report “is a bright green signal for the Fed to go ahead and move in December,” he said, and indicates that future rate increases should proceed at a “moderate pace.”

“The longer manufacturers keep struggling, the more likely the pace of Fed rate increases will moderate.”

For business leaders, of course, the greater certainty of a Fed rate hike later this month sets in motion a number of strategic considerations across many important sectors of the economy.

For housing-industry CEOs, a rate hike could put a drag on a robust recovery in the U.S. housing market that has continued to gain strength. In November, for instance, the United States experienced the biggest increase in construction hiring since January 2014.

Just as important to the U.S. economy as a whole is the impact any rate hike could have on the six-year boom in auto sales. After another strong month of sales in November, the sterling performance by carmakers looks likely to push the United States to a record level of sales of more than $18 million for 2015.

But the prospect of higher interest rates is one of the factors that makes many auto prognosticators believe that this year will be a high-water mark and that sales will begin to recede again in 2016. A one-percentage-point increase in a consumer’s interest rate raises the cost of a four-year, $25,000 auto loan by $11 a month or $528 over the life of the loan, noted a new study by the Federal Reserve Bank of New York’s staff. And because auto loans are shorter in duration than, say, a mortgage, they are more sensitive to changes in short-term rates.

Moreover, manufacturing remains a fly in the ointment. Amid the overall buoyant November jobs number, the Labor Department reported that the manufacturing sector actually lost 1,000 jobs in November. That reflected a contraction by U.S. manufacturing activity in the month to its lowest level in more than 6 years, as high inventories led to cutbacks in production, and a strong dollar hampered exports.

And so, manufacturing could suffer in the months ahead depending on the Fed’s plans for any further rate hikes after this month. “Depressed manufacturing activity historically has boded poorly for the overall economy,” The Wall Street Journal noted. “The longer manufacturers keep struggling, the more likely the pace of Fed rate increases will moderate.”

While most CEOs may see this month’s likely rate hike—after a nine-year hiatus—as a positive sign for the U.S. economy, it’s a complex addition to their decision-making dashboard.


Dale Buss

Dale Buss is a long-time contributor to Chief Executive, Forbes, The Wall Street Journal and other business publications. He lives in Michigan.

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