The Federal Reserve has approved an interest rate hike for the first time in three years. For the average consumer, financing options are about to get more expensive. With the current inflation rate and with people struggling in light of pandemic spurred economic difficulties, the Fed saw this as a prudent move to help rectify the situation.
In charting a course for moving forward and hoping to spur economic growth, the Fed foresees three more hikes throughout 2023 and potentially none in 2024. The last time interest rates were raised was back in 2018. During the pandemic, rates remained near zero. However, given that inflation is higher than anticipated, the Federal Reserve was also inclined to adjust its economic outlook during their meeting. They continue to assure the public that the economy is still robust, and they are pretty confident that tightening up monetary policies will help over the long term.
World Issues Contribute to Inflation
As we are in the process of moving out of the pandemic, COVID is still having a significant effect on the economy. Supply chain issues, workers shortages, and struggling small businesses have made the current economic climate inevitable. However, that is not all that is affecting inflation rates presently.
The war with Ukraine is undoubtedly contributing to the economic hardships faced by many worldwide at the moment. It is hurting the US economy, and it is putting more and more upward pressure on inflation rates. In contrast, much remains uncertain regarding this war and its eventual fallout.
This is not to say that the war with Ukraine is the primary factor in the Fed’s decision. For a couple of years now, they insisted that higher interest rates were coming. So what do these highest interest rates mean for the average person? What do they mean for small businesses struggling to come back from a tough time?
What Higher Interest Rates Mean for You
1. Borrowing costs are rising. Given that unemployment rates are much lower now than in the previous two years, the Fed deemed it appropriate to raise interest rates, insisting that people could now handle it. Keep in mind that borrowing becomes more expensive every time the rates go up. This means mortgages cost more, home equity lines of credit cost more, car loans cost more. And yes, business loans will cost more for both smaller and larger businesses. All in all, though, it is still relatively cheap to get a loan. Historically speaking, interest rates on many loans are still relatively low.
2. Inflation may slow down. One of the main goals of raising interest rates was to get inflation under control. Consumer prices are up almost 8% from last year. The Fed’s goal for this year was 2% – we have far surpassed that. And with the war in Ukraine still ongoing, things could get even worse. Oil especially is going to go up; people will likely pay a great deal more at the pump, even more than they are paying now. It will take time for the interest rate hike to impact inflation, but experts assure that it will have an effect.
3. Many stock investors are nervous. Generally speaking, stocks could be impacted negatively when interest rates go up. When the cost of borrowing goes up, companies may not be as likely to take out loans to grow their businesses. This, in turn, results in lower revenues. Lower revenues equal lower expectations. And so, investors might be inclined to sell stocks. While certain stores may perform well-given interest rate hikes, many investors are watching closely given current economic conditions.
For many people, the impact of interest rates on the economy and inflation can seem confusing. What you need to know right now is that borrowing costs will go up. It will cost more to get a mortgage or buy a car. You have a firm grasp on your finances, and understanding precisely what you can afford and when is thus imperative.
First Union Lending is Here to Help
Even though interest rates on loans are going up, that doesn’t mean that borrowing and getting a business loan is beyond the reach of a smaller business. In fact, rates are still historically low. Now is actually a great time to apply for financing for your small company. Whether you are looking for a short-term loan, a line of credit, or a merchant cash advance, we can help. And even if your credit score is less than ideal, we most likely still have financing options for you. Call today, and let’s get started.