What Businesses Should Know about a Rising Federal Funds Rate
The Federal Open Market Committee (FOMC) is a committee of the Board of Governors of the Federal Reserve System which is the central bank of the United States. As the FOMC considers raising interest rates, many business owners wonder what that could mean for their businesses. While it’s impossible to say exactly how a rate hike would affect individual companies, there are some general things to be aware of. In this blog post, Coastal Community Bank takes a look at what happens when the FOMC raises interest rates and some of the potential implications for businesses.
What is the Federal Funds rate, and how does it work?
The Federal Open Markets Committee (FOMC) is responsible for setting the Federal Funds Rate. This rate tells banks how much it would cost them to borrow from the Federal Reserve, and in turn impacts what rates they charge consumers and businesses on their loans.
It’s a simple system. You deposit money at your local bank, and those deposits help the bank extend loans or other forms of credit to customers. Regulators require banks to keep some percentage reserve or capital in case things go wrong–to ensure stability for all parties involved. The banks’ reserves are constantly changing, so banks borrow or lend money from the Federal Reserve to remain balanced. The Federal Funds Rate impacts how banks manage capital on each side of their balance sheet.
What happens when the FOMC raises the Federal Funds Rate, and why do they do it?
The FOMC raises interest rates to make borrowing more expensive and encourage saving. Decreasing borrowing decreases the amount of circulating currency, which generally slows economic growth, and reduces inflation.
How will this impact me as a business owner, and what can I do to prepare for it?
Higher interest rates may mean higher loan payments if you have a variable rate loan or are getting a new loan. When interest rates go up, the cost of business loans will increase for both large and small businesses. This may not be an issue for companies with fixed-rate loans since they’ll only pay back what was borrowed at the fixed rate in the loan agreement. However, businesses with non-fixed loan rates will likely have a higher interest rate on their loan, ultimately increasing the cost of borrowing. Work with your local banker to review financing options to help prepare for how rate hikes will impact your business.
The Federal Reserve is expected to raise interest rates on March 16th and continue raising thereafter at subsequent FOMC meetings until inflation is under control. While it’s impossible to say exactly how that will affect your business, there are some things you should be aware of. Your banker can help explain what a rate hike could mean for your company and answer any questions you have.
The last thing to consider is the overall implications of rising interest rates. The Federal Funds rate is being raised to slow the economy, likely due to inflation. Have you taken this potential increase in inflation into consideration for your business? Talk to your banker about the impact of increasing the cost of goods and a slower economy.