Newly nominated federal reserve Chairman Jerome Powell will raise interest rates. The reign of janet yellen and long run of near zero lending is ending. The confirmation of Powell is just a formality and Fed watchers are nearly unanimous in their belief that we will continue to see interest rates return to their historic range of 2 to 5 percent for a stable growth economy. In 1977 with the Federal Reserve Act the US congress established three key objectives for monetary policy: maximizing employment, stabilizing prices, and moderating long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve's dual mandate. In simple language - create a stable and predictable business climate that protects the economy from inflation and allows for growth. We'll make it even simpler - create a business environment where short and long-term plans can be made. The Fed Funds rate is what banks charge each other for very short-term lending (think overnight). This rate determines the cost of money for other transactions like credit cards, mortgages, car loans for consumers and lines of credit, bonds, and other business loans. How big of an increase will we see? At least a .25 or .50 point seems likely. The 2.75 mark is considered the new middle ground. A slow and steady climb is the most likely scenario. While .25 and .5 point hikes may seem nominal a series of increases can have serious consequences on your operations. Remember that these rate increases reverberate throughout the entire economy and are passed along with even greater rate increases to businesses and consumers. Now is the time to review your business finances and prepare for rising interest rates. At Dynamic Capital we developed a three-point review process that prepares our clients and prospects for these rate hikes:
- How will rising interest rates will affect your current business operations? Do you have a mortgage on any real estate? Fixed or variable rates? Take a look at any other existing loans and credit cards, are they pegged to the fed rate? Do you buy inventory with vendor financing agreements? Do you have the capital on hand to realize the growth you want? Any sizable equipment purchases on the horizon?
- How will rising interest rates will affect your customers? Do you sell to consumers and businesses? Both will be impacted by a rise; consumers with mortgage, credit card, and car loans, businesses with the same plus equipment, inventory, working capital, and other obligations.
- How rising interest rates affect will your competition? No one knows your market like you do. Will this be an opportunity to consolidate market share as your competitors are caught unprepared? Can you afford to be on the sidelines? Capital on hand gives you're the advantage of agility.