Berkshire Hathaway Benefits From Fed Rate Hikes

I am quoted in a Kiplinger’s article: “Why Warren Buffett Loves Fed Rate Hikes”.

I am expecting a slow, gradual increase in interest rates over the next two years. After the Federal Reserve raised short term rates (Federal Funds rate) by 1/4% today, and I believe they will again three more times later this year, then interest rates will be 1% higher a year from now.  Federal Funds were at 1/2 – 3/4% (near historically low levels) before today’s rate increase.  Since Berkshire currently has about $85 billion in cash invested primarily in short term Treasuries, a 1% increase in short term interest rates results in an additional income of $850 million per year for Berkshire.  Furthermore, Wells Fargo and Bank of America, two of Berkshire’s largest equity investments, will benefit from an increase in earnings as interest rates rise.  Their corresponding share prices should then also increase.
In a meeting with University of Maryland students on November 18, 2016, Warren Buffett said: “Stocks are cheap if long term rates are at 4%, four to five years from now.”  Currently, the 10 year Treasury is yielding only 2.50%.  In today’s environment, both Berkshire’s businesses (81% of assets) and its equity portfolio (19% of assets) should continue to do fine if interest rates rise gradually as most economists, including myself, are expecting.



About the Author

Dr. David Kass
David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: dkass@rhsmith.umd.edu (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.