Tags: federal reserve | rate hikes | animal spirits | investing

Four Reasons Carlyle Sees 'Animal Spirits' Reborn When Fed Hikes Rates

Wednesday, 01 October 2014 07:26 AM

Higher interest rates from the Federal Reserve may end up being more help than hindrance for the strengthening U.S. economy.

That counterintuitive suggestion is made in a new report by the Carlyle Group, the world’s second-biggest manager of investment alternatives to stocks and bonds, as the central bank readies to raise rates next year for the first time since 2006.

While a shift to tighter monetary policy risks rattling financial markets, it may also sound the alert to businesses that the economy is finally strong enough to stand on its own and so worth investing in, according to Carlyle’s Jason Thomas and Kewsong Lee.

“An increase in interest rates may be precisely the signal from the Fed that’s necessary to unleash the ‘animal spirits’ or sense of confidence necessary for business managers to transact, assume risk, and grow their businesses,” they wrote in the report titled “Higher Rates May Not Be All That Bad” and released last week.

‘Unmistakable Message’

The upbeat message — made in the past by UBS AG — from the Washington-based private-equity group is based on four arguments about how companies may respond when borrowing costs go up:

  • Loose monetary policy has relaxed the financial constraints that would typically prompt some businesses to sell assets and also left executives with few choices for redeploying their cash in a profitable way once they’ve made a sale. Higher rates would change market psychology, leading to more mergers and acquisitions which in turn deliver greater economic efficiency and a better allocation of capital.
  • Previous commentaries from the Fed on the state of its economy may have been over-interpreted by investors as suggesting it was in worse shape than it actually was. A rate hike would therefore “send an unmistakable message of confidence,” prompting investment spending to rise on expectations for more robust demand.
  • Easy money may allow underperforming companies to stay in business, reducing pricing power, profits and investment incentives for healthy firms. The loss or restructuring of the weak as rates rise allows market share to be reallocated to stronger companies, boosting productivity.
  • Higher rates could remove the worry that the Fed’s exit will be a drag on the economy. At the moment talk of rates being “artificially” low fans concern about the withdrawal and makes managers question the potential returns on any investment. A well-handled withdrawal of stimulus and maintaining of still-low rates could open wallets.

“The Fed’s policy change could send a powerful message to executives that the period of acute uncertainty requiring massive monetary stimulus has passed and it’s now time to expect employment, output and spending growth to normalize with interest rates,” said Thomas and Lee.

“Managers that internalize this message should exhibit an increased willingness to transact, take risks anticipate more opportunities.”

© Copyright 2020 Bloomberg News. All rights reserved.

1Like our page
Higher interest rates from the Federal Reserve may end up being more help than hindrance for the strengthening U.S. economy.
federal reserve, rate hikes, animal spirits, investing
Wednesday, 01 October 2014 07:26 AM
Newsmax Media, Inc.

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

© Newsmax Media, Inc.
All Rights Reserved