The it takes a long period from the

The
current inflation rate for the year ending in November 2017 was 2.20% which
represented a rise from the rate of 2.04% in October but a drop at the start of
the year which was at 2.50% in January. Lately the inflation rate has been
moving around its moving average which indicates that it is relatively flat.
The inflation rate for the next 12 months is forecasted to rise to around 2.1%
due to the gradual strengthening of the economy. The economic growth will
therefore lead to price inflations in the housing, medical care and other
services sectors which lead to total inflation. It is safe to say that the
economic indicator is a true reflection of the economic status of the country
currently, seen from the resurgent economy coming after several years of slow
economic growth under the Obama administration. Therefore, growth in GDP is
related to a rise in the rate of inflation as spending increases, while
increase in interest rates also affects inflation as it lowers it by scaring
people to borrow more. The rate of inflation is a lagging economic indicator
owing to the fact that it takes a long period from the time it is compiled and
when it is released, and also it only gives a trend of where the economy was
and where it is going rather than where it is.

The
rise in the inflation rate for the year 2016 compared to the year 2015-which
recorded an inflation rise of 1.3%-coincided with Wells Fargo’s growth in sales
and income, with 2016 recording a net income of $21.9 billion compared to
2015’s $22.8 billion. The company had to pay close to $1 billion in federal
fines and legal costs which affected its revenues. The company generated $88.3
billion in revenues in 2016 which represented an increase of 3% from 2015. However,
the growth and profitability is not entirely down to inflation rates going up
especially given the fact that inflation rates were relatively low, and
interest rates were also low due to slow economic growth and decline in oil
prices (Wells Fargo & Company Annual Report 2016, 7). Given that the
company performed relatively well despite the slow economic growth and low
interest rates I would recommend that they maintain their rates instead of
raising them to avoid losing customers. This is because the production capacity
of the economy means customers have more options to choose from and it would
scare them if the bank passed the price of inflation to them.

I
would say Wells Fargo’s stock is a safe bet for future long run. This is
because the company creates shareholder value and offers the ability to earn
quality returns on capital. The company’s stock is also greatly undervalued
which gives investors looking for a long term investment a good opportunity to
invest. The viability of the company’s stock is seen from the ability of the
company to increasingly grow yearly through all economic cycles, emerging from
the financial crisis of 2008 as the most profitable of the big four banks in
the USA. Currently the company earns a return on investment of 10% which is a
2% increase from 2008 (Trainer Para. 1).

Interest
Rates

Interest
rate is another macroeconomic variable that affects a bank’s performance. Low
interest rates have been shown to help in the recovery of economies as seen
from the low rates maintained by the Federal Reserve after the global financial
crisis in order to encourage borrowing. Low interest rates enhance the balance
sheets and performance of banks by increasing capital gains, reducing
non-performing loans, and supporting the price of the bank’s assets. However,
persistently low interest rates also affect the bank’s profitability as they
lead to lower net interest margins (NIMs) (Claessens et al 1).

In
the USA the Federal Reserve is responsible for setting the Federal Funds Rate
which now stands at 1.25-1.5% which represents a raise of 0.25%, the third time
the Fed is raising the rate this year. The interest rates in the country are
determined by three major forces; the Federal Reserve that sets the fed funds
rate which affects short term and variable interest rates; investor demand for
U.S Treasury bonds and notes which impacts long term and fixed interest rates;
and the banking industry that offers loans and mortgages that have changing
interest rates depending on the business needs of the moment.