Jun 22, 2018

Federal Reserve Rate Increase: Impact on Spending

The big news in the financial world is that the Federal Reserve recently raised interest rates by a quarter of a percentage point. Perhaps that might not seem significant to some observers, but it’s the highest level in years. And its effect on spending and the economy will be unmistakable.

“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent,” Fed brass said in an official statement. “The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”

For the full context, remember that back in 2008, the Fed submarined interest rates to record lows in an effort to give the economy a boost during the recession. Now, a decade later, rates are at the highest they’ve been since pre-recession.

The purpose for interest rate increases can essentially be summed up as a way to keep things stable and to control inflation. As one former official once joked, the Fed’s duty is to “take away the punch bowl just as the party gets going.”

And the people who feel the biggest pinch when the punch bowl is taken away are those with substantial debt and those who now must pay more to access financing. Mortgage rates are at a four-year high, while credit card rates are also climbing.

Likewise, businesses that rely on borrowing money will feel increased pressure. This is especially true for those that borrowed heavily during the heady days of zero interest during the recession. The fact is, more than $4 trillion will be due from corporate America by 2022. And rising rates will make that even more difficult to pay back.

The natural result of more money going to interest is less money going elsewhere. This means that spending will likely decrease, leading to slower earnings growth for businesses and uncertainty in the stock market.

According to one report, the prevailing notion is that there won’t be more rate hikes this year, but there may be as many as three in 2019. That will most likely exacerbate the existing limits on spending, as consumers and businesses use more money to pay for their debt.

Of course, the only constant in the financial world is change. And it’s important to note that these rate increases are in response to two factors that typically spur strong spending: low unemployment and strong wage growth.

The best thing for business owners to do is to stay updated on the Fed’s forecasts and strategically manage their debt. Rates will fluctuate over time, but as more people and businesses adapt to the changing world of borrowing, spending should remain strong and the economy will continue to grow at an acceptable rate.

 

To learn more about the Federal Reserve rate increases, read how it will affect credit and stocks in the near future.

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About the author

Grant Olsen
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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