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The Fed is poised to hike interest rates this year. Warren Buffett has compared rates to gravity — and said they ‘power everything in the economic universe’

Warren Buffett.

REUTERS/James Lawler Duggan

  • The Federal Reserve is poised to hike interest rates in a bid to curb inflation this year.
  • Warren Buffett has emphasized the critical importance of rates in valuing assets.
  • The investor compared interest rates to gravity, and recommended ignoring predictions about them.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The Federal Reserve is widely expected to combat soaring inflation by hiking interest rates this year. Higher rates have enormous implications for investors; Warren Buffett has repeatedly underlined their vital role in valuing stocks, businesses, and other assets.

The billionaire stock-picker and Berkshire Hathaway CEO has compared interest rates to gravity, as they represent the risk-free rate of return available to investors, and therefore affect the relative value of other assets. Higher rates also make borrowing more expensive, discouraging leveraged bets.

Buffett has recommended ignoring any predictions about the future direction of rates, and asserted that prudent, long-term investors don’t need to guess where rates will go next.

Here are Buffett’s 8 best quotes about interest rates:

1. “Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe.” (2013)

2. “Interest rates are like gravity in valuations. If interest rates are nothing, values can be almost infinite. If interest rates are extremely high, that’s a huge gravitational pull on values.” (2016)

3. “There’s nobody whose predictions on interest rates I would pay attention to, even myself, even Charlie.” (2018)

4. “It’s the same thing as predicting what business is going to do, what the stock market is going to do. I can’t do any of those things. But that doesn’t mean I can’t do well investing over time.” (Buffett was explaining that he has no idea what interest rates will be in the future.) (2020)

5. “The value of every business, the value of a farm, the value of an apartment, the value of any economic asset is 100% sensitive to interest rates. The higher interest rates are, the less that present value is going to be. Every business, whether it’s Coca-Cola or Gillette or Wells Fargo — its intrinsic valuation is 100% sensitive to interest rates.” (1994)

6. “The most important item over time in valuation is obviously interest rates. Low interest rates make any stream of earnings from investments worth more money. Any investment is worth all the cash you’re going to get out between now and Judgment Day, discounted back. Well, the discounting back is affected by which interest rates you use.” (2017)

7. “If I could only pick one statistic to ask you about the future before I gave the answer, I would not ask you about GDP growth. I would not ask you about who was going to be president, or a million other things. I would ask you what the interest rate is going to be over the next 20 years on average.” (Buffett was asked at what rate Berkshire would compound its intrinsic value over the next 10 years.) (2017)

8. “I would say that’s the most important question in the world. And I don’t know the answer.” — (Buffett was responding to a question about the impact of negative US interest rates on financial markets) (2020)

Read more: Warren Buffett is ready to deploy $80 billion if the market crashes this year. 7 experts say the investor should trim his Apple stake, acquire luxury brands, or buy some blue-chip stocks in the meantime.

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