07 June 2007
By Susan Harrigan
For years, the saying has been that in things economic, "when the U.S. sneezes, the world catches cold." Now, however, increasing global growth and tighter ties between countries' economies are starting to turn that old saw on its head.
The change was in sharp evidence yesterday when a decision by the European Central Bank to raise interest rates helped cause a drop in the U.S. stock market, with the Dow Jones industrial average sliding nearly 130 points, or about 1 percent.
Here's a primer on how and why global developments are affecting money matters here, and what a consumer could do to take advantage of the trend.
What happened yesterday?
In Frankfurt, the European Central Bank raised its benchmark interest rate one-quarter of a percentage point to 4 percent, the highest level since August 2001, in an attempt to combat inflation. Standard & Poor's expects further increases by the bank, and possibly by other central banks including Japan, according to S&P economist Beth Ann Bovino.
Why did events so far away move the price of stocks in the U.S. market?
They hurt the chances that the U.S. Federal Reserve will lower rates and increased the chances that it might raise them. That's because relatively high interest rates make a country look attractive to overseas investors, and the United States needs lots of foreign capital to pay for its budget and trade deficits, said Pearl Kamer, chief economist for the Long Island Association.
High interest rates aren't good for stock prices. They threaten company profits by raising the cost of capital and making it tougher for consumers to buy goods, according to Irwin Kellner, Weller professor of economics at Hofstra University and chief economist for North Fork Bank. They also make bonds look like a better investment than stocks.
Can rate increases in Europe have any more impact on my wallet?
You bet. "It's going to affect the local economy, there's no doubt about it," Kamer said.
The bad news is that long-term rates, which aren't controlled by the Fed, already are rising partly because of fears of global inflation. That can cause rates to rise for mortgages - a development that would prolong the housing slump - and make loans more expensive.
But there's also good news: Rising interest rates abroad are contributing to the dollar's decline. That makes it easier for U.S. companies to sell goods overseas. And it will help Long Island's tourist industry by making U.S. travel even more of a bargain for overseas visitors, as well as keeping more Americans home, Kellner said.
"The Hamptons will have a great business, and anyone in the New York area [tourist industry] will do well," he said.
How can I best handle my own finances?
As much as possible, be a saver, taking advantage of rising interest available on certain fixed-rate investments, experts advise. Raymond Mignone, a Little Neck-based financial planner, said he favors international bonds, because their returns get an extra boost from the dollar's decline.