As the Economy Heats Up, the Fed Continues on Its Path of Raising Rates
On Wednesday the Federal Reserve lifted its benchmark rate by a quarter of a percentage point. For those not paying attention to monetary policy, this is the second hike this year.
As a small business owner or even a solopreneur paying attention to what the Fed does with rates is important to your bottom line. The state of the economy as well as interest rates can have a direct effect on your expenses, the pool of potential employees, employee retention, and a host of other things in your business.
As the economy has continually improved Fed officials have been split about whether to raise rates three times or four times this year. The consensus seems to be coalescing around the likelihood of four rate hikes in 2018.
The premise behind the rate hikes is an attempt by the Fed to keep the economy from overheating.
With unemployment at 3.8%, the lowest since 2000, and predictions of a drop to 3.6% going forward, rising inflation is a real risk.
“The main takeaway is that the economy is doing very well,” Fed Chairman Jerome Powell said at a news conference. “Most people who want to find jobs are finding them, and unemployment and inflation are low.”
Let’s look at some of the ways this rate hike can impact you directly.
Higher borrowing costs
The Fed lifted the federal funds rate, which helps determine rates for mortgages, credit cards and other borrowing, to a range of 1.75% to 2%.
A higher rate makes it more expensive for banks to borrow money, which can translate into higher borrowing rates for consumers. The cost of higher rates for consumers can translate into less disposable income. It also means increased costs for your lines of credit, credit cards, and any variable rate debt you may have. Paying higher interest rates cuts right to the bottom line.
The Fed’s decision Wednesday was driven by “indications that inflation is right around the corner,” said Jason Reed, an economist and finance professor at the University of Notre Dame’s business school.
The long economic recovery has seen mysteriously low levels of inflation. But it has finally passed 2%, the level the Fed considers healthy.
It’s important to note that the Fed’s preferred measure of inflation, which strips out food and energy prices, climbed to 2.2% in May. This was the biggest registered annual jump in six years.
An ever-improving economy
The Feds recently offered an improved forecast for unemployment this year, lowering their forecast to 3.6%. They forecast an even lower unemployment rate of 3.5% for 2019 and 2020.
For seven and a half years, employers have added jobs every month, a record. And for the first time in at least 20 years, there are more job openings in the United States than there are people looking for work. The biggest puzzle in all this is the continued stagnation of wages.
Low unemployment seems like a good thing at first glance. But as small business owners this can hamper recruitment efforts. In order to attract quality candidates you may have to offer higher wages. The other risk is a complete lack of qualified candidates all together. Lack of qualified candidates can lessen your ability to grow and/or service your existing customer base.
Don’t get me wrong; the sky isn’t falling in on us. A strong economy is generally good news for all of us. As small business owners, we just need to be aware of the risks and fluctuations in the economy so we can manage our ship accordingly.
I encourage you to tune into what’s going on and adjust your financial forecasts accordingly. Fed Chair Powell announced that he plans to hold press conferences eight times a year, up from the current four.
Ensure that you are investing in your employee engagement efforts, building strong leaders, effective communicators, and redo your SWOT analysis to adjust for any potential threats to your industry based on rising interest rates and a tight labor force. If your strategic plans are more than a year old, it’s time to dust it off and examine your action plans.
About the Author Cindy Constable
Culture must be created, grown, and sustained by design over the long term. Cindy is a Culture Transformation Specialist for corporations. She uses a restorative process called A.I.R.R. to elevate your company culture and bring integration between your leadership, vision, culture, and team members to enhance overall performance.
