Prepare to Profit From This Game-Changing Move

After nearly a year of the Federal Reserve keeping rates as low as they can go, some are now starting to believe that it's time to reverse the rate reductions. Yet doing so would have huge implications not just within the financial industry, but throughout the entire business world.

Time to pop the next bubble?
Over the weekend, Barron's released a cover story that implored Fed Chairman Ben Bernanke to raise interest rates from their current target between 0% and 0.25% to what it termed a "more normal" 2%. The commentary cites low rates from 2001 to 2004 as contributing to the housing bubble that put the economy in its current predicament, and predicts similar problems with financial speculation if rates continue at current levels.

The Fed seems unlikely to increase interest rates in the near future, having signaled its preference to be too slow in monetary tightening rather than too fast. Given how fragile the nascent economic recovery seems right now, such caution may seem justified.

Regardless, when it finally does happen, raising rates will help some investors and companies while hurting others. Here's a quick look at who stands to win and lose from future rate increases.

Savers: nowhere but up
Low rates are great if you're borrowing money. Right now, though, plenty of people have money to lend -- and they're not getting much for it. The shortest-term Treasury bills pay less than 0.1% right now, leaving many money market funds struggling to pay anything at all after expenses. Banks are managing to pay a bit more on online savings accounts and CDs, but you won't find the 5% many banks paid a few years back until the Fed starts pushing rates up again.

Once rates rise, though, all that could change. Savers could start seeing their income restored, boosting their confidence in making ends meet. No one would be happier to see rates rise than savers with money on the sidelines who plan to keep it there.

Banks: the end of a great ride
On the other hand, financial institutions thrive in a low-rate environment, especially when a steep yield curve creates big differences between the short-term rates they pay depositors and the longer-term rates upon which many loans are based. JPMorgan Chase (NYSE:JPM) had huge earnings based largely on the fixed-income environment, and banks like Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) have seen growth in net interest income play an important role in maintaining at least some degree of financial stability.

Higher interest rates, though, could put those profits at risk. The big question is how long-term interest rates would respond to a Fed rate hike. If long rates also rose, then interest spreads could remain constant. But if they didn't rise as much, narrowing spreads would put pressure on bank profits, potentially creating another liquidity crisis within the financial industry.

Stocks: a mixed picture
More broadly, rising rates would have differing impacts on various stocks. As Barron's points out, higher rates could help support the U.S. dollar, which has been fairly weak lately.

Although that might sound like welcome news, a stronger dollar could actually hurt some U.S. businesses that rely on exports. Consider, for instance, just how much of their revenue these companies get from overseas:

Source: Capital IQ, a division of Standard and Poor's. Based on latest available annual figures.

These companies could see their earnings hit hard, as a stronger dollar reduces the value of their foreign-currency revenues. In contrast, some companies get relatively little revenue from overseas. General Mills (NYSE:GIS), for instance, gets more than 80% of its revenue from within the U.S., insulating it from currency risk.

In addition, higher rates could make it harder for some companies to maintain their debt. Although low rates have provided ample opportunity for companies to get new financing to make debt more manageable, you'd inevitably see some weak borrowers hurt by rate increases.

Not if, but when
With rates as low as they are, it's pretty much a given that the next move will be up. Whether rate increases come sooner or later, investors who anticipate them will be better poised to take advantage of the opportunities that higher rates will bring.

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