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What effect would an interest rate hike have on U.S. wallets?

If and when the Federal Reserve Bank raises interest rates, which is widely expected, it would be the first such hike since the 2008 financial crisis. Raised rates will impact the cost of home mortgages and there will be consequences for corporations too. Eric Platt from the Financial Times joins Hari Sreenivasan.

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  • HARI SREENIVASAN, PBS ANCHOR:

    If and when the Federal Reserve Bank raises interest rates, as it is widely expected to do possibly this week, it would be the Fed's first rate hike since before the 2008 financial crisis.

    The cost of your home mortgage and borrowing money for just about anything will likely go up. There will be deep consequences for corporations, too.

    Financial Times reporter Eric Platt joins me now for some insight. So, how did companies take advantage of these near-zero percent interest rates, cheap money over the past six, seven, eight years?

  • ERIC PLATT, FINANCIAL TIMES REPORTER:

    So, over the past three years, we've seen more than a trillion dollars of issuance each year. And it's accelerated each year as they try to take advantage of cheap borrowing costs.

    They've used that money to fund buybacks and also to purchase other companies in what's been a record wave of mergers and acquisitions.

  • HARI SREENIVASAN:

    So, this is how they are able to give some of those stock dividends or — to investors?

  • ERIC PLATT:

    Exactly. Instead of using cash that they have, they can, you know, tap debt markets nearly unlimitedly. We've seen Apple doing it.

    They have cash overseas that they'd rather not take a tax hit on. So, instead they issue bonds here to pay back dividends to shareholders or buy back shares.

  • HARI SREENIVASAN:

    So Apple's a big, successful company. I get that. But what happens when the rates start to creep up little by little and the cost of borrowing gets more expensive?

  • ERIC PLATT:

    So the companies you would be looking at would be anything that's speculative grade, particularly in the energy sector, which has been hit by this drop in commodity prices.

    It also is to companies like American Apparel, which is struggling under a debt load, companies like Sears and JCPenney, which have struggled with the rise of Amazon.

    So, anyone that's borrowed heavily over the past few years to finance their operations or haven't been able to turn around their operations would be under threat.

  • HARI SREENIVASAN:

    So those companies, we could actually see them start to default on some their loans because it's not so cheap any more?

  • ERIC PLATT:

    Well, that won't be the main concern. It would be if energy prices continue to stay down here. However, the issue is if they were able to finance their operations over the past few years with debt issuance, and now they come to the market in 2016 or 2017 and investors aren't interested.

    They might not be interested in paying six percent or seven percent interest rates if they can get access at all.

  • HARI SREENIVASAN:

    And so what happens on a consumer front? What's the ripple effect if there is this contraction in liquidity for companies?

  • ERIC PLATT:

    So that's what the Federal Reserve has been looking at. They have been hoping that robust jobs growth would take away any kind of default you would see.

    And so if these companies do fail, they would hope these jobs will be made up elsewhere. They could go into the health-care sector, education, which has been adding jobs at a very fast clip.

    That said, their concern is if consumer confidence dips a little bit. If you see big companies go under. Which in the energy sector, if suddenly consumers don't want to– they spend a little bit less, so they pull out money from the stock market.

  • HARI SREENIVASAN:

    So what are the odds then going into this week? The Fed could raise the rates as soon as this week — who says what? Who is betting on now versus December?

  • ERIC PLATT:

    So, economists on Wall Street bet now. They say the Federal Reserve wants to get ahead of any potential crisis in the future. So if in 2017, suddenly we see economics growth slow, you know, they could lower rates to kind of spur borrowing costs.

    But traders don't think they will. Traders say they are worried that with the ripple effects of China and financial market gyrations over the past few weeks that the Fed doesn't want to add to that volatility. And so they may wait until December.

  • HARI SREENIVASAN:

    All right, Eric Platt of the Financial Times. Thanks so much for joining us.

  • ERIC PLATT:

    Thanks for having me.

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