In racing, cars fly around the track at top speed jockying for top position. But after a crash occurs, a designated safety car comes out to slow the track down until it’s safe to resume faster speeds.
The Federal Reserve (or the Fed), and its ability to lower and raise interest rates, is much like that safety car. When economic conditions, such as growth or prices, are at speeds deemed “unsafe” by our nation’s top economists, the Fed can “apply the brakes” to the economy by increasing the target interest rate – which lowers the financial speed limit – to keep things moving, but at a temporarily slower speed.
While it’s easy to forget about the Federal Reserve when you are running your own business, the link is never that far away. Simply stated, the Fed and the interest rate it sets have an enormous impact on the overall growth rate of the economy – and your business.
The Fed sets the rate banks charge each other to borrow money, which in turn affects the rates that individual borrowers face. Because an interest rate is the percentage that a lender charges a borrower for a loan, interest rate changes impact all types of borrowers from homeowners to business owners.
As we move into a higher interest rate environment, how might this affect your business?
There are impacts to business that can create challenges including a disruption to cash flow, lower consumer spending and impacts to profits. However, a solid strategy that you develop with your trusted advisors can often lead to better outcomes in any rate environment. Collaborating with your banker is key – especially when it comes to a potential business loan.
The biggest factor for the Fed raising rates right now is to combat the inflation that has been set in motion by recovery from the pandemic and by international crises that are exacerbating supply chain issues.
Think of inflation this way: Imagine a huge act was going to hold a concert at Autzen Stadium and there are 50,000 available tickets at $200 per ticket. Because it’s a big-name act, every ticket would sell out very quickly with demand exceeding supply. Now imagine some super wealthy person showered Eugene with hundreds of millions of dollars in free money. The cost of those 50,000 tickets to see the concert would suddenly skyrocket as people had extra cash to bid up ticket prices. That’s inflation — too many dollars chasing too few goods.