Fed is pausing rate hikes, but likely to raise later in the year

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The Federal Open Market Committee (FOMC) opted on Wednesday, June 14, to postpone a June rate hike after 10 consecutive months of hikes. However, the FOMC indicated that the Fed is leaning toward a July hike if inflation continues.

Recent indicators suggest that economic activity has continued to expand at a modest pace. Job growth has been robust in recent months and the unemployment rate has remained low. Meanwhile, inflation remains high.

In the long term, the FOMC aims for both maximum employment and inflation of 2%. In pursuit of these goals, the committee decided to maintain the target range for the Federal Funds Rate at 5 to 5.25%, the highest level in 16 years. Officials unanimously approved the tariff decision. Holding the target range at this meeting allows the Fed to assess additional information and its implications for monetary policy.

In determining the degree of additional policy strengthening that may be necessary to bring inflation back to 2% over time, the Committee takes into account the cumulative tightening of monetary policy, the delays in monetary policy affects inflation, and economic and financial developments .

The FOMC reviews a wide range of information, including measures of labor market conditions, inflationary pressures and expectations, and financial and international developments.

“I would almost say that the conditions we need to meet to bring inflation down are being met,” Fed Chairman Jerome Powell said during his speech. press conference in Washington, DC, on Wednesday, June 14. Chairman Powell also said the FOMC has not yet made a decision on a rate hike in July.

“There is a way to bring inflation down to 2% without the kind of sharp downturn and big losses we’ve seen in the past,” said Chairman Powell. “The committee is in full agreement on the need to bring inflation down to 2%, and we will do everything we can to bring it down to 2%. That is our plan over time.”

The Fed chairman said allowing inflation in the US economy is “something we must not allow to happen for the benefit of today’s workers and families, businesses but also for the future”.

“Regaining and restoring price stability will benefit generations of people,” he added. “Understand that’s our top priority.”

Chairman Powell said nearly all committee participants expect some more rate increases to be in place this year.

“It may make sense for interest rates to rise, but at a more moderate pace, but we did not decide on a hike or pause at the July meeting,” Powell said.

Borrowing challenges for small businesses

The Federal Reserve kept the Federal Funds Rate low for nearly a decade before the COVID pandemic hit and they were near zero immediately after the pandemic until March 2022. Since then, the central bank has raised rates at every meeting to date. This year, the increases narrowed, with rates increased by 25 basis points in March, April and May.

The steady series of interest rate hikes has brought interest rates for the people to about 12% SBA 7(a) Loans. Ever-increasing interest rates are negatively impacting small business cash flow, as most small business loans are variable rate loans. Thus, borrowing costs rise, affecting cash flow, as well as the ability to borrow for growth or hire workers in an extremely tight labor market.

Bank loan loans usually come at lower rates than SBA loans. As of today, the Prime Lending Rate is 8.25%. However, we have seen that banks reject more than 8 out of 10 applications for funding, according to the latest Biz2Credit Small Business Loan Index (figures May 2023) released last week. Credit union approval rates are even lower than banks.

At the moment, alternative lenders are the most willing to lend. But even these non-bank lenders provide capital to only 28.9% of applicants. From 2012 to July 2016, approval rates doubled, peaking at 67.3% in December 2013.

So the challenge for small businesses right now is whether or not to borrow. Banks and other lenders are not granting loan applications as often as in the pre-pandemic past. Further, when they approve loans, the cost of capital is significantly higher than during much of the previous decade.

Small business owners face two choices. The first is to postpone growth plans, put off replacing old equipment, and refrain from hiring at high wages. The other option is to borrow now at one variable interest in anticipation of an eventual fall in rates if and when inflation begins to ease. Indeed, these are challenging economic times for small business owners.