The Federal Reserve may be raising rates again, following a hike just a few months ago in December of 2016. Rates have been held very low for the past seven years or so in an attempt to relieve pressure on the economy. Fed members say that the evidence suggests the economy is steady and that raising rates will fight inflation and stimulate economic growth.
The Fed, much like Wall Street, have been making a series of predictions based on the imminent policy changes of a Trump administration. The December hike is just the beginning of a series of hikes designed to remain aggressive in the fight to keep our economy prosperous.
Some experts are questioning the decision of the Fed, looking for more benchmarks that economy is doing well enough to sustain another increase. Despite concerns, the Fed said that employment is doing well and consumer confidence is soaring: two key indications that rates could sustain another raise.
What Does A Fed Rate Change Mean for The Economy?
The “rate” is the federal funds rate, or the interest rate that one bank charges another bank to borrow money. This rate is important because it determines what interest rates the bank will charge for all their other loan products.
It’s similar to the wholesale price of a product. A retail store buys the product at wholesale, marks up the item a certain amount or percentage, then offers the same products to customers. They make their money in the markup. While this doesn’t directly translate to the federal funds rate, it is a similar concept.
When the federal funds rate rises, there is a gradual rise in other interest rates. When federal funds are lowered, there is a gradual decrease in other interest rates. The federal fund has been kept very low since 2008 which is the reason that mortgage rates are at historic lows.
Fed Rate Changes And Small Business
When the fed rate tightens, business loans and other forms of credit will be more expensive. In that regard, rate changes have a physical effect on businesses. However, when the federal fund rate is looked at as a benchmark rather than a price tag, higher interest rates generally mean good things for business. Higher interest rates generally happen when the economy is doing better and small business is booming. But this correlation is anecdotal and not concrete.
Fed Rate Changes and Personal Finances
However, those of who are solopreneurs understand that “small business” metrics are not generally accurate to describe business outlook. For a solo entrepreneur, the company’s finances are more closely tied to how personal finances are performing. In that light, a higher federal fund rate could mean a significantly higher interest payment over time.
It’s important to understand that all shifts are gradual. But any fluctuating interest rate, such as a mortgage or credit card, will likely go up over time. When you run your office out of your home, your mortgage is intrinsically a part of your small business.
Now is a good time to focus on paying down debts that have higher interest rates and refinancing variable-rate mortgages into fixed-rate agreements. These moves will help keep your personal finances in order, a critical move for solopreneurs.