The reason to increase interest rates is to reduce the supply of money.
Currently in the US wages are growing significantly, but inflation is out pacing that. This leaves less money available to spend for the average person, add on higher interest coming (mortgage/ credit cards etc) and even less cash.
Yes some costs are due to one off issues due to covid, and supply chain but not all. Low interest rates create excesses in an economy.
The same occurs for companies as a lot of their forward valuation is based on the discount interest rate, and increased borrowing costs, and the ease they can get their hands on money to grow.
The trouble now is the inflation rate has been negligible for years, so reducing interest rates to record lows occurred. Like a large ship, it takes ages to start to turn and just as long to pull back to straight.
How Will this effect PLS?
A drop in consumption is not good for many companies, but we are in the biggest growing sector.
Which is why I am still very positive here.
The baby often gets thrown out with the bath water at the start of a panic, that’s a risk for all companies, but strong ones come back quickly.
cheers
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