A recent article written by Greg Ip discusses one of the great mysteries of the recovery – why have low interest rates done so little to lift business investment in America? After all, this is supposed to be one of the ways that monetary policy works. Faced with lower borrowing costs, firms are more likely to purchase equipment to increase market reach and revenues.
The firm also has to hire people to operate that equipment. But according to economist Jason Thomas of the private equity behemoth Carlyle Group, low interest rates may actually be hurting investment by encouraging companies to pay dividends rather than to invest.
Thomas estimates that since two thousand and nine, just after the Federal Reserve reduced key short term rates to near zero, U.S. companies boosted their dividends by nearly sixty seven percent. Here’s the issue. With interest rates being so low, investors, including retirees, are hungry for income. As a result, they have tended to purchase shares of companies that pay significant dividends.
That has produced a preference for companies that return cash to shareholders rather than investing in business capacity. The implication is that to boost investment, the Federal Reserve may actually have to raise the interest rates it controls.
