As most of us know, rates “only” went up 25 basis points in January, causing many to breathe a sigh of relief. After a tumultuous 2022 which saw large increase after large increase (including a record four consecutive 75 basis point increases), there was a feeling in the air of “maybe it’s ending soon”.
I appreciate (and somewhat share) the optimism, but my initial response to that is “not so fast”.
On February 7th 2023, in response to a much-stronger-than-expected jobs report, Federal Reserve Chairman Jerome Powell said “We didn’t expect it to be this strong”. He then further expanded on this, saying “It kind of shows you why we think that this will be a process that takes a significant period of time.”
Powell also mentioned that it will take more than a year for inflation to get back to 2% (the Fed’s target).
Let’s unpack this for a moment.
The Federal Reserve has been raising rates to combat inflation. By raising rates, the hope is they slow the economy (by curbing demand), allowing inflation to fall. But while inflation has shown signs of peaking/slightly falling, the economy remains quite strong.
What this says to me is rates will keep rising for the foreseeable future. Probably by small amounts (say 25 basis points at a time). And then when rates peak, they will hold fast. I’ve been saying this for a while, but it’s definitely coming to fruition – rates are going to stay at the levels we have now (and go even a little higher from time to time) for a long time. Too long for anyone to wait out.
What Can You Do About This?
Simple: do business in this environment. You have no choice. Rates are not going to return to 2021 levels for a long time (if they ever do).
The good news is rates are still quite manageable – they are only “high” in the context of the past few years. There are plenty of successful business owners right now who paid much higher rates when they were starting out in the 90’s and early 2000’s. Taken into historical context, borrowing money is still quite inexpensive.
Stay the course folks. Business is still getting done, and customers still want what you do.