Thecurrent inflation rate for the year ending in November 2017 was 2.
20% whichrepresented a rise from the rate of 2.04% in October but a drop at the start ofthe year which was at 2.50% in January. Lately the inflation rate has beenmoving 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 willtherefore lead to price inflations in the housing, medical care and otherservices sectors which lead to total inflation. It is safe to say that theeconomic indicator is a true reflection of the economic status of the countrycurrently, seen from the resurgent economy coming after several years of sloweconomic growth under the Obama administration. Therefore, growth in GDP isrelated to a rise in the rate of inflation as spending increases, whileincrease in interest rates also affects inflation as it lowers it by scaringpeople to borrow more. The rate of inflation is a lagging economic indicatorowing to the fact that it takes a long period from the time it is compiled andwhen it is released, and also it only gives a trend of where the economy wasand where it is going rather than where it is.Therise in the inflation rate for the year 2016 compared to the year 2015-whichrecorded an inflation rise of 1.
3%-coincided with Wells Fargo’s growth in salesand income, with 2016 recording a net income of $21.9 billion compared to2015’s $22.8 billion. The company had to pay close to $1 billion in federalfines and legal costs which affected its revenues. The company generated $88.3billion in revenues in 2016 which represented an increase of 3% from 2015.
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However,the growth and profitability is not entirely down to inflation rates going upespecially given the fact that inflation rates were relatively low, andinterest rates were also low due to slow economic growth and decline in oilprices (Wells Fargo & Company Annual Report 2016, 7). Given that thecompany performed relatively well despite the slow economic growth and lowinterest rates I would recommend that they maintain their rates instead ofraising them to avoid losing customers. This is because the production capacityof the economy means customers have more options to choose from and it wouldscare them if the bank passed the price of inflation to them.
Iwould say Wells Fargo’s stock is a safe bet for future long run. This isbecause the company creates shareholder value and offers the ability to earnquality returns on capital. The company’s stock is also greatly undervaluedwhich gives investors looking for a long term investment a good opportunity toinvest. The viability of the company’s stock is seen from the ability of thecompany to increasingly grow yearly through all economic cycles, emerging fromthe financial crisis of 2008 as the most profitable of the big four banks inthe USA. Currently the company earns a return on investment of 10% which is a2% increase from 2008 (Trainer Para. 1).
InterestRatesInterestrate is another macroeconomic variable that affects a bank’s performance. Lowinterest rates have been shown to help in the recovery of economies as seenfrom the low rates maintained by the Federal Reserve after the global financialcrisis in order to encourage borrowing. Low interest rates enhance the balancesheets and performance of banks by increasing capital gains, reducingnon-performing loans, and supporting the price of the bank’s assets. However,persistently low interest rates also affect the bank’s profitability as theylead to lower net interest margins (NIMs) (Claessens et al 1).Inthe USA the Federal Reserve is responsible for setting the Federal Funds Ratewhich now stands at 1.
25-1.5% which represents a raise of 0.25%, the third timethe Fed is raising the rate this year. The interest rates in the country aredetermined by three major forces; the Federal Reserve that sets the fed fundsrate which affects short term and variable interest rates; investor demand forU.S Treasury bonds and notes which impacts long term and fixed interest rates;and the banking industry that offers loans and mortgages that have changinginterest rates depending on the business needs of the moment.
