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The Fed's Interest Rate Cuts Amps Up The Buyback Debate

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The Federal Reserve's move to cut interest rates has accelerated the already hotly contested issue of stock buybacks. Debt Bet The Fed cut interest rates for the first time in a decade, in hopes of guarding the American economy from the effects of China’s economic slowdown, which could drag down the world economy. The Fed cut lowers the interest rates one takes on when getting a loan. For consumers, that means it will be easier to, say, buy a home, which boosts the economy. But how the interest rates cut will affect companies is becoming a matter of debate. Of Interest As noted by Bloomberg, there was a time when companies would take on debt in order to add capacity. So, in theory, an interest rate cut would make borrowing more appealing for companies, who might then invest in, for example, more employees or long term development or factories or something else that could grow a business and boost the economy. But investment is stuck at low historical levels, as companies are more likely to borrow money to buy back their own stock, thus driving up their stock price and giving “a bigger payout to shareholders,” per Bloomberg. Back In It The Fed has now shined light on the buyback debate, which shows no signs of stopping anytime soon. To recap, guys like Apple’s Tim Cook, Warren Buffett and Jamie Dimon love buybacks, viewing them an efficient way to use excess capital, and a boon to shareholders. But to their critics, buybacks tend to prioritize investors over employees, as that excess capital could be going to employee compensation, research and development and other long-term investments that could help a company grow. This is already an important issue, and it looks as though the Fed has now supersized it. -Michael Tedder Photo: Brendan McDermid / REUTERS