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Financing Your Business

What Does the Fed's Interest-Rate Increase Mean for Business Owners?

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The recent rise in the Federal Reserve's short-term interest rate ticked it up a mere 0.25 percentage point. But the move— the first increase since the rate was lowered to near zero during the Great Recession of 2008— felt like something very meaningful.

For business owners, it might not be.

"The major concern among business owners is the uncertainty of how a rate increase affects consumer demand," says Jeffrey Carr, clinical professor of marketing and entrepreneurship at NYU's Leonard N. Stern School of Business. "They're asking themselves, 'Does this mean people will buy fewer of my products?'"

Carr says the answer is an unequivocal, "No."

"On the operational side, business owners will be be fine because overseas suppliers won't raise costs," he says, pointing to competition among global suppliers that makes it difficult for them to raise prices. "If the cost of manufacturing in China gets too expensive, businesses will get their supplies from Vietnam, and then on to Indonesia, and so on," he says.

The hike in the interest rate, the banks charge each other to borrow money, seemed to surprise no one. Federal Reserve Chair Janet Yellen had been signaling the move for months.

Here's how it will — or won't — affect different sectors of the economy:

  • Construction: Builders won't likely feel any effects from the rate increase because the loans most important to their business, mortgage rates, are more influenced by the rates on 10-year U.S. Treasury notes. "There's not a strong relationship between the Fed raising rates and the rate on the Treasury note," says Carr.

    Carr says that currently, the 10-year Treasury note, the "safe haven" where investors flee during worldwide political or economic upheaval, is as safe a place to invest as anywhere. "And when more people invest in Treasuries, the interest rate on mortgages typically falls," he says. "We're still within such low historical mortgage rates that it's hard to see how the demand for homes could be effected by the Fed's move."

    The forecast: Since construction loans are relatively disconnected to the Fed's rate, those in the construction industry don't need to worry, says Carr.
  • Manufacturing: One effect of the Fed's move has been the strengthening of the dollar. "If you're an American business owner manufacturing in China, for example, your costs might actually fall as you use fewer dollars to buy something," says Carr.

    The forecast: Carr says he doesn't see how the Fed rate will affect the demand for products or services, "especially if your customers are in the States," he says.
  • Retail: Brick and mortar retailers routinely worry that any rate hike will impact their customers, particularly their access to credit. "Consumers will not see their credit card rates go up," says Carr. "They're already near 20 percent in some cases, and those rates are in an environment where the Fed's rate has been zero."

    The forecast: One of the biggest expenses for traditional retailers, payroll, is not affected by the Fed's rate. "The theme here for retailers is, do not panic," says Carr.

So business owners shouldn't be worried now, but is there a point at which they should start being concerned?

"Business owners should worry when their customers worry and cut back on expenditures," says P. Jeffrey Christakos, a CPA at Westfield Wealth Management. "In a recession, that would happen, but the Fed's move is designed to keep inflation in check and reduce the chance of a serious recession."

Christakos says pundits will inevitably try to predict future rate hikes and correlate that to an economic slowdown. "The Fed monitors various components of the economy regularly, and they use a rate hike to bring those components to the targeted levels," he says. "When the targets are reached, adjustments will be made. Other results could lead to other adjustments. The truth is no one really knows. But we do know one thing: If the economy starts peeling back to recession, the raising of the interest rate will definitely slow down."

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