Tags: UBS | Tight | Fed | Policy

UBS: Tighter Fed Policy Will Help US Economy

Thursday, 03 Apr 2014 07:29 PM

The increasing likelihood of a Federal Reserve interest rate increase next year should help rather than slow the U.S. economy, according to UBS AG.

Capital spending as well as mergers and acquisitions should rise with the anticipation of tighter policy after a period of near-zero interest rates and low volatility cut the impetus for companies to invest, Stamford, Connecticut-based economist Drew Matus said in a March 31 report.

“The expectation for rising rates may prove helpful,” said Matus. “Low rates not only lower the cost of delaying investment decisions but also encourage other behavior that can be detrimental to business investment.”

In periods of low rates, equity investors usually favor companies that buy back shares and pay dividends, said Matus. That encourages chief executive officers to use cash in those ways, rather than invest in new plants or machinery.

“The result is obvious — lower capital equipment spending (and mergers and acquisitions) than otherwise would occur,” said Matus.

The expectation for the Fed to raise its benchmark next year may reduce the returns of buybacks and dividends while making capital investment more attractive this year, said Matus, a former Federal Reserve Bank of New York economist.

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The increasing likelihood of a Federal Reserve interest rate increase next year should help rather than slow the U.S. economy, according to UBS AG.
UBS,Tight,Fed,Policy
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2014-29-03
Thursday, 03 Apr 2014 07:29 PM
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