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IPC COMMUNITY 18 FALL 2023 Because higher interest rates curtail spend- ing, we would normally expect to see higher rates lead to layoffs as businesses face wan- ing demand. But companies, at least for now, appear reluctant to lay off workers for fear they will not be able to find workers to hire when the economy picks up again. As a result, we are likely to see businesses look for other ways to contain costs in the year ahead. In a high-interest-rate environment, companies may shift their focus from growth and expan- sion to cost-cutting and efficiency improve- ments. This might include pushing on suppli- ers for price concessions. 2. Higher interest rates create a higher hurdle for new projects. Businesses evaluate the viability of new cap- ital projects using a variety of financial met- rics. One of these is net present value (NPV), which is widely used to assess the profitability of different investment opportunities. A posi- tive NPV indicates that the projected earnings (in present dollars) exceed the anticipated costs, also in present dollars. NPV calculates the present value of all future cash flows gen- erated by the investment, both incoming and outgoing, and then subtracts the initial invest- ment cost. The present value of each cash flow is calculated by discounting it back to its value in present terms, using a discount rate that typically reflects the cost of capital. Higher interest rates increase the discount rate used in NPV calculations, which means new proj- ects will require higher estimated cash flows to achieve positive NPV. As a result, new ini- tiatives will face a more stringent financial threshold to be considered viable. 3. Higher rates have shifted funds from deposit accounts, leaving banks with fewer resources to fund loans. Money market yields are above 5%, the high- est since the 1990s. As a result, retail money market deposits have surged by 50% com- pared to a year ago, indicating a significant shift in where people are choosing to park their money for better returns. At the same time, deposits at commercial banks have decreased by nearly $750 bil- lion—a 4.1% decline—over the last year and are expected to continue this downward trend in the coming months. This reduction in bank deposits not only limits the banks' lending capacity but poses a particular challenge for small firms that typically rely on bank loans for their financing needs, only further exacer- bating the challenges they face in a high-inter- est-rate environment. There are several ways higher interest rates might impact electronics manufacturers directly. For example, electronics manufacturers often rely on complex global sup- ply chains. Higher interest rates can increase the cost of financing inventory and may lead to higher prices for components, affecting the overall cost structure. Higher interest rates in the U.S. have driven the value of the dollar higher. But other countries are

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