PERSONAL FINANCE

Why You Should Care About The Fed’s Jackson Hole Meeting

The Federal Reserve is holding its annual meeting in Jackson Hole. Its debate over interest rates could affect your business
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Six years ago, the global economy nearly collapsed under the weight of subprime mortgage-backed securities. Since then, the U.S. economy has gotten better. But the Federal Reserve is not sure whether the economy has improved enough for it to raise interest rates.

If the Fed decides--at its three-day annual meeting in Jackson Hole, Wyo., which starts Thursday--to change what it says about its interest rate policy, that announcement could affect your business.

Before getting into that effect, let's look at what the Fed does and how this meeting might change things. The Fed generally sets short-term interest rates by buying or selling treasury securities. The Fed has twin goals that can conflict: to keep inflation in check--below 2%--and to keep unemployment low (it does not seem to have a specific target for this).

Starting six years ago, however, the Fed took extraordinary measures to save the global economy. For example, it acquired huge quantities of bad debt from failed and failing banks--ballooning its balance sheet from $800 million to $4.3 trillion--and it began a policy of buying back longer-term treasury securities with the idea of lowering their interest rates (dubbed Quantitative Easing).

Most importantly, the Fed cut the short-term interest rate to approximately zero. And if you take into account inflation, the Fed is in effect paying a negative interest rate.

The economy is certainly better off than it was six years ago.Recent economic reports say that Gross Domestic Product increased 4% and inflation was below 2%.

The evidence on the employment front is not so good. The unemployment rate was at 6.2% in July--which is lower than what the Fed expected but above the 4% rate that is considered healthy.

But millions are still unemployed and the unemployment rate is expected to rise if people begin to reenter the job market to search for jobs that they previously thought did not exist.

And wages have not gone up much. Citigroup economist Willem Buiter told the Chicago Tribune that the 2% rate at which hourly earnings have risenis lower than during any other expansion in the past 50 years.

This brings us to Jackson Hole where the Fed is expected to debate the question of whether it should change investors' expectations that the Fed will raise short-term interest rates sometime in the middle of 2015.

If the Fed concludes that inflation is roaring out of control, it will raise interest rates sooner. If it decides that inflation is in check and that the bigger risk is weak employment and stagnant wages, the Fed is likely to make no change to interest rate policy.

If the Fed announces that it will raise rates before mid-2015, interest rates will rise in anticipation. If your small business has a loan that fluctuates with the Fed Funds rate, you will start to pay more in interest. And you should learn about what it might cost to convert that floating rate loan into a fixed rate one.

If your small business provides loans to customers, it may be able to charge them higher rates to cover the higher cost of money.

If you sell a product to consumers, then you may face tougher sledding because those consumers will start to pay higher rates on their personal loans--such as borrowing money from their credit card companies --and may have less money available to buy your products.

However, if your customers are people who depend on interest income--mostly elderly--they will start to have more money because their accounts will pay them higher interest than they did before.

What if your small business does not borrow money but takes equity capital to keep the lights on? In that case, you should care about what happens at Jackson Hole because you need the stock market to keep going up.

After all, the hope of higher equity prices is crucial to keeping the market for initial public offerings going strong. And IPOs are a critical method for venture investors to get a return on their risky investments.

If the Fed decides to raise interest rates sooner than expected, that could hurt stocks--unless investors consider it a sign that the Fed thinks the economy is going to accelerate.

And if that happens, companies will hire more people, and pay higher wages to the people who do have jobs. That will be good news for overall demand--an economic trend that would boost your business.

My hunch is that there will be no surprises coming out of the Fed. And that means you will not be able to count on it to enhance your company's performance.

It's up to you to do that.

IMAGE: Getty
Last updated: Aug 21, 2014

PETER COHAN

Strategy consultant, startup investor, teacher, corporate speaker, pundit, and author of 11 books, Peter Cohan has invested in six startups, three of which were sold for a total of $2 billion. Before founding Peter S. Cohan & Associates in 1994, he worked with HBS strategy guru Michael E. Porter.




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