The Federal Reserve was anything but silent in 2018. There were multiple interest rate increases, which drew the ire of President Trump, who claimed the higher interest would negatively affect stock performance and corporate earnings.
“I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake,” the president tweeted December 18. “Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!”
Adding to the intrigue, the stock market certainly went on a wild ride in December. Observers noted it was comparable to December 1931, when the nation was mired in the Great Depression.
Given this volatility (from the president, stock market, and elsewhere), the Fed may very well dial back the anticipated rate increases in 2019. This slowdown would be welcome news for many who were concerned after the Fed’s Open Policy Meeting in September. The minutes from the meeting indicated they felt future rate increases were highly appropriate due to strong consumer spending, low unemployment, and other positive factors.
Now, reports indicate that while the Fed recently raised its benchmark interest rate by a quarterpoint, which was the fourth increase of 2018, it also lowered its projections for future rate hikes.
“The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term,” the Fed said in a statement after its most recent meeting.
If you’re curious how this statement differs from what the Fed had said a month earlier in their November statement, only two words changed. But they’re significant. First, they amended the word “expects” to “judges” in the first line, which definitely softens the stance. They also added “some” to the first line, which suggests the number of increases will be smaller and more contained.
“While this was a dovish hike from the stance that the Fed was in before, this is somewhat not as dovish as many participants probably wanted,” observed Charlie Ripley, a senior investment strategist. “It would have been a difficult move for the Fed to completely remove some of the 2019 hike expectations, but I think they’re making the message clear that they’re going to remain more data dependent as we go into 2019.”
So how will the anticipated rate hikes of 2019 impact small business? Well, the good news is that higher interest rates typically mean lenders are more likely to approve loan requests. The incredibly low rates seen in the past decade have required you to pay less for the money you borrow, but it also means smaller profit margins for the people doing the lending. As the rates gradually rise, there’s more wiggle room for lenders, and they’re more likely to give you the green light.
The stats back this up, as small banks have been approving 49.9% of requests. That’s the highest approval rating we’ve seen since 2014. For their part, larger banks have been approving about 26% of requests, which is also quite high.
If you’ve got CDs and savings accounts, you’ll also see positive results from the higher rates. With lower rates the past several years, there wasn’t much action taking place. Now, as one economist phrased it, “Savers are finally getting their day in the sun.”
Of course, rate hikes aren’t entirely blissful. There is still the unfortunate truth that it’ll cost more money to acquire capital. So for those who are planning to seek financing in 2019, the sooner you can do it the better. The Fed is expected to move slowly with its rate hikes, so getting a loan in February will almost certainly cost less than getting a similar loan in November.
It’s worth mentioning that even with additional rate hikes looming on the horizon, most small business owners are optimistic about their current situation and the outlook for the coming year. The most recent Small Business Optimism Index from the National Federation of Independent Business gauged optimism at the highest level seen in the survey’s 45-year history.
With solid consumer spending, deregulation, and tax cuts all playing a role, the future looks bright for the majority of small business owners. In fact, the Small Business Optimism Index showed that a record number of entrepreneurs plan to grow their businesses in 2019.
Whatever your unique business plans are, don’t let the Fed’s actions control your destiny. Be strategic when it comes to borrowing money, so the impact of rate hikes will be mitigated as much as possible, but don’t let it close doors for you. After all, the Fed said in their statement that “further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation.”