The Federal Reserve’s decision to raise interest rates by three-quarters of a percentage point, or 75 basis points, for the third-consecutive time at the Federal Open Market Committee meeting, is a step taken to cool the economy and rein in inflation.
However, if the Federal Reserve’s FOMC next moves match the market expectation for two more interest rate hikes by the end of 2022, small business loans will reach at least 9%, maybe higher. This will force business owners to make difficult decisions. Businesses especially those in the rebounding services sector are healthy today, and credit performance remains stable in the small business community. However, the Fed’s aggressive stance against inflation will lead more business owners to think twice about taking out new debt for expansion. This is a lending conundrum small business owners have not experienced since the 1990s.
The Fed is not likely to reverse interest rate hikes, since inflation is proving stickier than originally forecasted. Key areas of the economy, such as the labor market is just not cooling fast enough.
"Demand for lending hasn’t changed yet, but we’re getting dangerously close to where people will start to second guess"
According to CNBC’s economists and investment managers survey, the Fed is likely to reach peak rates above 4% and hold rates there throughout 2023.
"Demand for lending hasn’t changed yet, but we’re getting dangerously close to where people will start to second guess,” said Chris Hurn, founder, and CEO of Fountainhead, which specializes in small business lending.
