As the Fed has been increasing the interest rates, it has affected the loan policies of KBR. They have decreased the debt in their overall capital structure and this is reflected in their Debt to Equity ratio, which has decreased from 2. 03 to 1. 30. They are now looking to fund growth from internal operations and also stock issues. Common stock has increased from by around 27 % in the year 2007 as compared to 2006. Therefore, additional funds are entering through capital stock and increase in profits as mentioned earlier.
One more indirect effect of interest rate increase is on unemployment. As interest rates are hiked to stem the flow of inflation, jobs are also cut as growth decreases. There is a greater supply of workers than jobs available. This drives wages down as workers are willing to settle for less in tough times. KBR has to pay less to its workers in the United States and might also have to announce layoffs. KBR has more than 60 thousand workers in its company, so the unemployment rate has a great effect on the company (KBR, 2008).
3. If inflation increases and the Fed acts to lower it, explain how the Open Market Committee might do that and then how such action(s) might have either positive or negative effects on your organization. The Federal Open Market Committee (FOMC) controls one of the tools of monetary policy – Open Market Operations (Federal Reserve Bank, 2009). OMO’s control money supply and the interest rate buy buying and selling government securities such as Treasury Bills.
In the case of rising inflation, the FOMC will have to stem the inflation by using OMO’s. They have to reduce the money supply and increase the interest rate to curb inflation. To reduce money supply, they will have to sell government securities to the market. As people buy these securities, money supply is drained from the market and interest rates rise and consequentially, inflation is controlled. Interest rate rise will make it more expensive to borrow money and it will have a negative effect on KBR.
As discussed, it will have to fund growth internally or through stock issues. On the other hand, wages go down as growth is slowed, and workers are hired who are willing to work for less or wage cuts are announced.
Eckholm, E. (2005, March 20). Now You See It: An Audit of KBR. Retrieved February 10, 2009, from The New York Times Week in Review: http://www. nytimes. com/2005/03/20/weekinreview/20eckh. html? _r=1 Federal Reserve Bank. (2009, February 6). Federal Open Market Committee.
Retrieved February 10, 2009, from Board of governors of the Federal Reserve System - Monetary Policy: http://www. federalreserve. gov/monetarypolicy/fomc. htm KBR. (2008). About KBR. Retrieved February 10, 2009, from KBR Careers: http://www. kbr. com/careers/about_kbr/index. aspx KBR, Inc. (2008). KBR. Retrieved February 10, 2009, from KBR, Inc. : http://www. kbr. com/ ObamaBiden. com. (2009). War in Iraq. Retrieved February 10, 2009, from Issues: http://www. barackobama. com/issues/iraq/