At the end of August, the attention of investors will be focused on Federal Reserve (the Fed) Chairwoman Janet Yellen as she speaks at a two-day monetary policy conference in Jackson Hole, Wyoming, and will signal whether the central bank will yet again delay an interest rate increase. In anticipation of the long awaited news, Reda Bedjaoui, CEO of Redbed Investments LLE, explains why the decision is paramount to shareholders, and its probable effects on the stock market.
In an attempt to increase the supply of capital and boost spending after the 2008 recession, the Fed implemented record low interest rates, and has since been reluctant to increase them. With the economy approaching a seemingly full recovery, and July’s job reports far exceeding estimated growth, many financial experts are predicting Yellen to announce the first substantial rate hike in years.
Often associated with a decline in stock prices, Bedjaoui reminds investors that an increase in the Fed rate will have no direct, immediate impact, but will instead influence the behavior of several contributing factors, primarily banks and businesses, that will then indirectly affect the stock market. Initially, banks will increase their interest rates, making it more expensive for both corporations and individuals to borrow funds, and essentially decreasing their spending power. Businesses are then faced not only with consumers who are buying less of their goods, but also with a financial industry that is making it difficult to borrow, spend, and grow.
Stock prices are determined by the expected future cash flows of a company, divided by the number of shares available to investors. Companies that experience higher debt expenses or a decrease in revenue will see their estimated amount of future cash flows, along with their stock prices, drop. If declines become widespread, indexes such as the Dow Jones Industrial Average or the S&P 500 will reflect a slump in the entire market. Investors often view this as an undesirable increase in the risk of stocks, and instead turn to government securities, such as Treasury bills and bonds. However, Reda Bedjaoui notes that interest rates are only one of an incalculable amount of interrelated determinants whose interactions can result in a myriad of scenarios, and cautions against making preemptive shifts in investment strategies.
Born in Paris, France, Reda Bedjaoui received a Bachelor in Law degree from Université de Montréal. Before being admitted to the Bar of Quebec, Canada in 1995, he attended The Hague Academy of International Law. Fascinated by the ways in which corporate governance, risk management, and regulatory compliance affect a company’s goals and, by extension, its bottom line, he dedicated his life to anticipating trends, pricing, and demands. As a result, he has spent the past decade managing commodity risk exposure and providing governance to a number of international companies, consequently becoming one of the world’s foremost financial authorities.
Reda Bedjaoui — On When to Avoid Top-Performing Funds: http://finance.yahoo.com/news/reda-bedjaoui-avoid-top-performing-070132257.html
Reda Bedjaoui — Outlines Importance of Corporate Governance: http://finance.yahoo.com/news/reda-bedjaoui-outlines-importance-corporate-041125094.html