But just how will it affect our local business and general economy here in Queens? Over the past 42 months we…
Some would say that Fed Chairman Alan Greenspan’s move in hiking the federal funds rate by a quarter of a point is a matter of interest.
But just how will it affect our local business and general economy here in Queens? Over the past 42 months we watched the federal funds rate decline from 6.4 percent to just 1 percent, making this the most aggressive interest-rate cutting campaign in our nation’s history.
During this period of time in the low interest rate mode, it was the corporate sector (e.g. banks, car dealers, real estate in the way of mortgages and merchant big ticket items) that were the real winners with these exceptionally low interest rates. But the shift to the potentially higher rates will certainly change the rules of the game.
For example, interest rates on five-year CDs should rise from the current 3 percent to 5 percent over the next one-year period. For those with a sizable amount of cash to invest and those on fixed incomes, this all becomes good news. So who gets hurt in this upward trend?
Expectations are excellent that the Federal Reserve will eventually raise the funds rate to 4 percent. This will certainly not help the mortgage, bank or real estate market when mortgage rates stare back at them at over 7 percent sometime during 2005. Rates like this will dry up the refinancing market not to mention the home equity market as well.
And what about the credit card market? Look for those to rise, too, which will certainly hurt the bigger tag items such as appliances and automobiles. Auto dealers will certainly have to guard their bottom line leading to a possible end of zero financing. The average middle-income family in Queens may just decide that the faithful pair of wheels can last another year or two.
And the same holds true for the washer, dryer, oven range, dishwasher and refrigerator. With the higher cost of money you can also look for a contraction in the area of home improvement. The hardest hit area here would be home improvement supplies since they would be needed by both the home improvement contractors as well as self-style handymen.
So how will business be with rising interest rates? I am not so naive as to believe such low interest rates can be sustained indefinitely. But extreme care must be exercised since there are signs that our economic recovery can retract just before or after Election Day. Further moves upward (if any at the moment) must be performed with profound caution.
Joe Palumbo is the fund manager for The Palco Group, Inc. an investment company and can be reached at palcogroup@aol.com or 718 461 8317.
