Alan Greenspan, the Fed chairman, had been hinting for months that his concerns about inflation were getting to be more worrisome than his concern over the economic recovery, and that we should eventually expect interest rates, which are at a historic 46-year low, to go up again.
On June 30, the Fed decided to raise the Federal Funds rate (a key short-term loan interest rate that banks use to determine how much they owe each other when they borrow the money they have on deposit from each other overnight) from 1% to 1.25%. The Fed also voted to raise the discount rate, the rate at which the Federal Reserve banks charge other banks for a short-term loan, from 2% to 2.25%.
The Fed Funds rate is the baseline upon which all interest rates are based in the United States. Greenspan chopped the Fed Funds rate from 5.5% to 4% in May 2001 as the US economy started faltering, and kept cutting in half-point increments as the September 11 terrorist attacks hit and the economy went into a recession in late 2001 and early 2002. By December 2003, Greenspan had cut the rate to 1%.
In announcing the rate hike, Greenspan said that he was inclined to take baby steps to try to put the brakes on inflation (gas, milk, and other prices are skyrocketing), but he did not rule out more severe action if inflation starts running away. The current interest rate hike that is spreading out to the institutions that lend to consumers will also affect the institutions that lend companies money in order to finance or lease computer equipment.
IBM responds by increasing rates
IBM’s Global Financing unit announced last week that it was jacking up interest rates by 1% for its ‘Low-Rate Financing’ deal, which it has used for the past six months to help drive IT sales in the uncertain economy. The deal allows companies that are buying from $25,000 to $1 million in gear to get financing for low rates (at least by IBM’s standards); customers buying pSeries products can get the low rates on deals as large as $2 million.
Under the modified deal, IBM’s best rate is now 4% for iSeries, pSeries, zSeries, and xSeries servers and their associated storage, up from the 3% rate IBM set in May 2004. In January 2004, IBM was charging 3.25%, and even pSeries deals had a $1 million cap. If you read the fine print, these rates are only offered for qualified customers (meaning those with decent credit and solid financials), and they are only available on capital leases with a 24- to 36-month term with a $1 end-of-lease payout.
The interest rates IBM charges for PCs is 4.5% under the higher rates, and it is charging 4.4% for any software sold under a one-time charge licensing option and for various services from its Business Consulting Services unit. Financing for IBM’s Integrated Technology Services products (this is systems integration as opposed to business process engineering work) has been given a financing rate of 4.9%.
As is the case with the baseline Fed Funds rate, these IBM rates are a baseline against which all real-world interest rates rise and fall. No matter how good or bad your credit rating is, if you are an IBM customer and you want to finance gear this week, it costs more than it did the week before. As interest rates go up, IBM may not be inclined to make announcements about it, and it may kill low-rate financing deals entirely and offer other kinds of incentives, such as trade-ins or plain old discounts.
The deferred payments option
IBM has another trick up its sleeve, and that is deferred payments. Big Blue has been offering deferred payment plans on financed equipment off and on for years as a formal announcement, and has probably been giving it as an informal product to key customers for decades. Last week, IBM announced that companies that choose Global Financing to acquire gear, as outlined in the deal above, can get their payments deferred until 2005 if they acquire their gear and have it shipped before the end of the third quarter (September 30).
You might think that IBM would combine these deals (low-rate financing and deferred payments) because it is raising the cost of computing for companies as it reacts to what the Fed has done (and as other central banks around the world will do if their economies warrant it). But IBM probably doesn’t want its third quarter to take the hit.
The deferred payment deal would let companies use IBM’s equipment, software, and services as financed through Global Financing for anywhere from 4 to 6 months without having to pay for it. That would be a great double-whammy. However, the low-rate financing and deferred payment financing are, according to the IBM announcements, separate deals.
If IBM is hot to trot on a deal in your shop and you are financing, make IBM give you both options on your deal. The economy is not as good as many would have us believe, and inflation is being driven largely by higher energy costs, which ripple through every aspect of the economy.
