On Wednesday, the United States Federal Reserve announced that they have raised interests rates by 75 basic points (bps). This is the latest in a series of rate hikes that are intended to bring down the ongoing inflation. The Federal Reserve doesn’t appear to be done with the rate hikes as additional increases should be expected in September and next year. For all Americans, rate hikes carry heavy financial implications that will take it’s toll on the street market.
Borrowing costs will now be much higher although the current borrowing costs are low relative to history. Last year, business loan interest rates dipped by 4% but the dip did not last and now the average Small business loan interest rate is almost as high as 8%. Small business owners will pay a little extra monthly depending on the loan amortization period but the increase won’t mostly be a major cash flow issue because many small business can afford the 75 bps. The 75 bps is also not significant on long term loans.
The biggest way the rate hike will affect the overall market is that banks will now tighten their lending requirements. Banks will definitely be getting worried over who and who can afford a loan with the current rate hike and even if the current business loan approval rates are unchanged, the credit policies in several banks are beginning to tighten. Many small businesses who depend on banks for cash injection in an inflated economy will close up because they cannot meet new, stringent bank credit policies.
When banks tighten, women and minority businesses suffer the most because they are smaller, have less cash flow, have less history of servicing debt and lower margins. At a time of massive economic pressure like this, their margins become more vulnerable. The minority businesses are mostly in more sensitive sectors of the economy like smaller retail markets. Banks will now be much more likely to lend to much more established firms. This will mean a scarcity of street level retail goods and service outlets which will result in a price hike in daily consumables.
Increase in the rate of downsizing is also definitely a major possibility going forward. Businesses that can no longer afford loans are looking to cut production costs by downsizing. Many of the big companies have already started cutting down their staff which has left many people back on the human capacity market in the middle of an economic inflation. Market observers have noted that there is still more downsizing to come and this does not send a good message to the already bloated number of job seekers.
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