By Tina Irgang
The Federal Reserve announced this week it was raising short-term interest rates for the first time since the 2008 financial crisis. The hike in rates is capped at a very modest 0.25 percentage points for now. Still, could you be feeling effects from the hike in 2016?
The answer is far from clear-cut. For example, small businesses will probably see interest rates on their loans go up as a result of the Fed’s move, as Forbes points out. But on the other side of the coin, “banks – which pulled back from small business lending during the financial crisis – might increase their lending to small businesses if the economy improves. That would be especially welcome as bank loans are cheaper than most other sources of capital,” Forbes says.
What’s more, interest rates on business loans would likely only go up with those lenders whose rates are significantly influenced by the Fed, such as those backed by the Small Business Administration, notes personal finance information service NerdWallet.
The Financial Times offers a similarly ambivalent take: “Many corporations have taken advantage of the low rate environment to borrow money via the bond markets. Most companies say they are relaxed about the impact of a small rate hike, believing the market has already priced their bonds for such an event. However, some economists say the interest payments for companies who have issued low-grade debt could rise more quickly.”
What’s more, FT says, rising interest rates could mean a reduction in competition to some extent, as companies whose existence was predicated on ultra-low-cost borrowing go out of business, freeing up market share and potentially skilled talent.
So what will the rate hike mean for consumer buying behavior? Will people suddenly stop buying your products or services because they expect to pay more interest on credit cards, auto loans and home mortgages? Probably not, because it will take a while for consumers to feel much of any effect, argues The Los Angeles Times: “The small increase [in rates] — coupled with the lingering effects of the central bank’s unprecedented stimulus efforts — would increase the typical delay it takes for consumers to feel any effect from a rate change.”
The paper also points out that the Fed expects to increase rates very gradually in the foreseeable future and has kept rates low for nearly a decade, both of which could further lengthen the amount of time it takes for rising rates to trickle down to consumers.
Finally, there’s the fact that the rate hike is said to indicate growing confidence in the stability of the American economy going forward. So is this the time to step up your hiring or invest in fancy new office space?
Maybe not, unless you’re feeling especially bullish about growth in your own market or industry. As The New York Times points out, the Fed left open the possibility of pulling back on any increases if it appears they are weakening economic recovery. That seems to make the hike a tenuous vote of confidence at best.
Tina Irgang is the production editor for SmartCEO. Contact her at firstname.lastname@example.org.