The Federal Reserve is set to increase interest rates due to high inflation and the labor market returning to levels consistent with maximum employment. Coupled with the sharp drop in unemployment in the second half of last year, to 3.9% in December, inflation rates have skyrocketed at the fastest pace since 1982. (RELATED: Wholesale Prices Rise at Fastest Pace Since Records Began)
According to multiple sources, the Fed gave its clearest indication today that it could raise rates starting as soon as March.
As Gallup reports:
The federal government recently reported that the 7% increase in inflation in December 2021 was the highest increase in nearly four decades.
The Federal Reserve has yet to increase rates after slashing them early in the pandemic, but Federal Reserve Chair Jerome Powell recently told Congress that he expects the Fed will raise interest rates multiple times in 2022 as a means of bringing inflation under control.”
While a rate hike will make money more expensive, making it especially difficult for small and medium-sized businesses to borrow money, Powell said there's plenty of room to raise rates. Similarly, experts at Forbes contend that an increase in interest rates will help alleviate red-hot inflation and soothe stock market volatility.
Corrections are a healthy market function to keep valuations in check and prevent asset bubbles. This is part of what's happening now. We're overdue.”
…
Historically, when rates increase it's actually good for stocks overall. Again, the implications are that rates are going up to slow (not stop) the rate of economic growth. A strong economy can be very good for companies.”
BusinessTown reports there may be a silver lining for small businesses, as counterintuitive as it may seem:
Following the 2008 fiscal crisis, traditional banks all but completely shuttered their loan offerings to small business owners, citing high risk and low profit margins as a reason to avoid small business loans. While a growing marketplace of online alternative lenders have stepped in to fill the small business lending void, the result for business owners has been more choice at a higher cost.
If traditional banks do take this cue to loosen the reins on their small business lending standards, the resulting uptick in the availability of bank loans could force down the rates from alternative lenders eager to maintain their market share.”
BusinessTown also recommends that smaller business considering borrowing for a business loan avoid hesitating for too long in order to avoid higher rates.
While business owners might not feeling the impact right now, a continuation of this trend over the next several years could eventually translate to an increase in small business loan rates. For business owners considering a loan or line of credit in the next several years, this is one more reason to take such steps sooner rather than later.”
As for consumers, higher interest rates are good news for savers and bad news for borrowers. When rates go up, savers can earn higher returns, but debt typically becomes more expensive. Experts at Nerdwallet advise many who have not dealt with such interest hikes in their lifetime to free up debt wherever possible in order to prepare.
Such an initial rate bump would be an opportunity to prepare yourself for a possible trend toward higher rates. Reducing debt, especially when you're paying a variable interest rate, will help you get ready for a rising-rate environment. So will increasing your savings and staying focused on your long-term investing strategy, in spite of day-to-day fluctuations in the stock market.”
For homeowners, the hike is likely to increase mortgages to a higher rate.
The Fed's rate increase ended what has been effectively a zero-interest-rate environment, because the federal funds rate has been so close to zero for so long. The rate hike will likely mark the end of historically low mortgage rates, although the rise in such rates is expected to take time to get started and be slow once it gets underway.
However, if the Fed continues to boost short-term rates over the next two to three years — and inflation climbs —homebuyers will see mortgage rates rise significantly.”
In the meantime, expect the first rate hike to take place at the Fed's next meeting in March.
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The opinions expressed in this article are those of the author and do not necessarily reflect the positions of American Liberty News.
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