Impact of interest rate hike on businesses

The Federal Reserve raised short-term interest rates today, the ninth increase in a row. In other words, just a year ago (June of 2004), the interest rate was as low as 1 percent. With today’s increase, it stands at 3.25 percent. While it is only a 2.25% increase and that may not sound much, but if you were paying a $100 in interests on a loan, expect to pay over $300 now. In other words, over 3X. And that is what I intend to address in this article. What will be the impact of steady rise in interest rates and how to deal with them?

While the Federal Open Market Committee (FOMC) says that the the stance of monetary policy remains accommodative (in other words, the Fed would love to raise rates even more in the near future), higher interest rates curtail spending. The Fed admitted that energy prices have risen further, but argues that the expansion remains firm and labor market conditions continue to improve gradually. It added that pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained. To summarize, the Fed is trying to stop the economy from overheating by trying to maintain a balance, considering that we have huge budget and trade deficits to deal with.

So expect small (or as the Fed likes to say, “measured”) increases during coming months and hope that energy prices do not go up any further. If we can continue to grow at 3% plus rates, the US economy should be fairly stable. In its Monetary Policy Report to the Congress in Spring this year, the Fed said the same, “The fundamental factors underlying the continued strength of the economy last year should carry forward into 2005 and 2006, promoting both healthy expansion of activity and low inflation.”

What does it mean for you?

  • The Fed doesn’t always get it right. While they are a bunch of very smart people, as I have always said, forecasting is not an exact science. It is almost like asking a six-year old how fast the economy will grow next year. So do not base your strategy on forecasts and projections about the future.
  • Be realistic, watch the numbers carefully in real time, and respond to external environment as fast as you possibly can. Consider investing in a set of tools often referred to as “dashboards.” These tools will allow you to get a good understanding of where your business is at a glance.
  • Oil (and energy) prices are expected to remain high during 2005-06 period. Coupled with higher interest rates, consumers’ disposable incomes will fall. They are more likely to defer or avoid making non-essential purchases. Consider offering no-interest financing options or delay in making any payments to motivate them to purchase.

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Google reaches the top in search market

Mickey Alam Khan, writing in DM News, says, “Still advertisers don’t get it. Online generates only 4 percent to 5 percent of advertising, despite usage accounting for almost 16 hours weekly. But TV, with consumption at roughly 15 hours weekly, gets 20 percent of ad budgets.” I have been arguing the same and keep asking why there is so much inertia among the advertising and marketing strategists. Don’t they ever think in terms of advertising ROI? (Related article: P&G becomes the first company to cut back on TV advertising)

We can only expect that advertisers will look more closely at their strategy, as Michael Moe, CEO of ThinkEquity Partners expects. They expect online advertising to reach $22 billion by 2008, up from the current $10 billion. A report today that shows that the search engine giant Google continues to rule the market should make the advertising executives spend more time thinking how to distribute their ad dollars more effectively among various channels.

Google, Yahoo, MSN, search engine market share chart data

Google is growing not only because of the brand awareness that it has but also that more people are now online and spend more time than ever before. As discussed at the Circulation Management Conference & Expo, people spend more time on the Internet than on television now.

What does it mean for you?

    Despite the fact that WebSideStory is suggesting that you use Yahoo and MSN also for your advertising campaigns, I am advising my clients to stick with Google. Both Yahoo and MSN will continue to lose share, particularly because Yahoo search has clearly deteriorated.
    If you have not already done so, do an ROI analysis. You do not have to stick with television just because you always have done so. In any case, let the numbers tell you what is best for your business.
    Last year I had suggested that companies work with bloggers to run marketing campaigns. While this is very controversial and the strategy has its critics, I see nothing wrong with it. Companies always pay celebrities to endorse their products (and rarely do they actually use them). Similarly, bloggers are merely influencers and there is nothing wrong with paying them to reach the target audience.

Recommended article: Don’t give up on print media yet