What Every Small Business Needs to Know About Recent Rate HikesCarolyn Crummey
Interest rate increases are normally regarded as a negative factor in terms of economic growth and business, but the last 10 years have been anything but normal for the economy. After slashing interest rates to nearly nothing at the height of the financial crisis in 2008, the Fed had been compelled by a variety of factors to keep interest rates low in order to nurse the economy back to health. With unemployment at approximately half of what it was during the crisis and over 10 million additional jobs added to the economy, the Fed forecasted increased positive expectations for economic growth and a lower unemployment rate, leading their economists to feel comfortable with raising interest rates.
In the December 16th announcement, Fed chief Janet Yellen made it clear that, although the energy and manufacturing sectors are still experiencing pressures, she considered the economy to be “quite sound,” and that, in addition to future rate hikes being gradual, rates overall would remain low for a while. Upon her announcement, the DOW rose over 200 points as both individual and institutional investors took the news well. Longstanding uncertainty and speculation over the Fed’s actions and future plans were put to rest.
While small business owners may not experience the direct effects of the rate hike in the same immediate way that investors have, there are various potential side effects that an entrepreneur planning a startup or running a small business should consider.
Most obviously, the low-interest home and business loans that banks have offered during the recovery from the recession are likely to experience rate hikes to match the actions of the Fed. However, the effect of the rate hike is far from direct or immediate. In an article published in Barron’s, Amey Stone references experts at JP Morgan, Oppenheimer, and Franklin Templeton to draw the conclusion that rates are unlikely to rise a great deal in 2016. In fact, to the surprise of some, the week after the rate hike announcement saw a decline of 0.01 percent on the average 30-year fixed mortgage. In the words of Sean Becketti, Freddie Mac’s chief economist as cited by the Associated Press, “The Fed raising short-term rates by itself doesn’t have a very profound effect on mortgage rates.”
However, the eventual effect of rising interest rates on consumers and businesses is inevitable. For an entrepreneur with credit approval who is planning on taking out a loan for either a startup or additional small business growth, the time to put plans in motion and lock in a low-interest rate may well be now. In addition, both consumers and entrepreneurs who do not have superior credit can expect that the change to make previously inaccessible credit available to them, as banks customarily loosen their requirements when rates and profitability go up. A potential entrepreneur who had struggled to qualify for a business loan for a new startup may now find funds available for the venture.
There are ramifications for established businesses as well if they are able to understand and tap into their clients’ needs. For instance, according to an article published by Bankrate, the rate hike is likely to cause a buying window in the housing industry as consumers seek to refinance, obtain home improvement loans, and even buy homes for the first time while credit rates are still at historical lows. Small business owners who cater to any aspect of the housing industry may want to investigate ways in which they can make inroads on potential new clients who have been pushed off of the proverbial fence and into action by the rate hike.
In the same article, Alan MacEachin, corporate economist at Navy Federal Credit Union, points out another effect of the rate hike that could have further ramifications on entrepreneurs and small business owners who cater to seniors. “Rising interest rates would benefit elderly Americans on fixed incomes,” he says.
A side effect of the rate hike is that the yield on fixed income investments that seniors rely on will improve, putting more money in the pockets of seniors whose spending power has been severely constricted over the past decade. Small business owners who cater to seniors can expect their clients to have more cash, and businesses that do not cater directly to seniors should be aware that seniors may now constitute even more desirable customers.
Whether the rate hike has direct effects on established small business owners and entrepreneurs, it behooves them to be aware of the financial climate in which they seek to do business. While, in the short term, the rate hike may not have immediate ramifications, planned additional rate increases certainly will have a prolonged effect. If nothing else, the rate hike is a strong indicator that the Fed believes that the economy has fully recovered.