The Silicon Valley Bank and First Republic Bank failures may not stop the Fed from moving forward with more interest rate increases.
First came the revelation that Silicon Valley bank lacked enough liquidity to cover customer deposits.
Then came the infamous tweet about a “Run on the bank!” Then came the rush to withdraw money, which sent the regional bank into a tailspin. That was followed by a frantic 48 hours that saw one of the top 3 bank failures in U.S. history.
Subsequently came the bailout, or whatever Joe Biden wanted to call it. Next came the political scapegoating, with blame being handed out on an hourly basis. No matter how it started, or who gets blamed, for small business owners none of that matters.
How will the economy respond? That’s the issue for the job-creators—the small business owners who account for 99% of the jobs in the United States.
How will this affect small businesses’ ability to access capital? Without capital, America’s economic engine will lose steam quickly. Will the Fed increase interest rates again, despite the recent threats to the financial system?
Why is the Fed raising interest rates?
Consider why the Fed decided to raise interest rates from the beginning. The economy had over-heated. Consumers were spending, supply chain challenges limited supply and money could be borrowed for next to nothing.
As a result, inflation began to soar. Soon the American consumer couldn’t keep up with expenses—even though wages were increasing.
Bring in the Feds, wielding seemingly the only effective tool in their bag to steer the economy away from hyperinflation, the interest rate hike.
By taking money out of the economy, in the form of making access to liquidity more expensive, demand decreases as do prices. The “invisible hand” of the economy and all that is in play (think back to freshman year and Economics 101.)
Interest rate increases will cause an increase in unemployment. With less demand, businesses will need fewer employees. This facet of the rate hike iteration has already begun within the tech and automobile sectors among others.
Throw in a major shock to the financial system, and it seems the interest hikes broke things. The hikes did “break” the economy. That was the Fed’s intention from the beginning. So, now that the Fed has our attention, they can chill on the rate hikes, right? Not necessarily. Unemployment numbers for February still came in higher than projected. Inflation held steady year-over-year. But holding steady means that prices continue to increase. The end-goal for the Fed has been to stop prices from increasing.
The European Central Bank (ECB) increased rates by 50 basis points. That increase came in the shadow of Credit Suisse bank having identical liquidity problems to those of their American counterparts in Silicon Valley.
What should business owners expect next?
Now the Fed has a responsibility to “fix” what they broke. Fixing most likely means continuing to increase lending rates.
Small business owners can expect capital to be more expensive from the bank. They can also expect to find already tight lenders asking for more in order to loan less.
In the end, look for a 25 basis point increase from the Feds next week.