As you well know, over the last 18 months, the Federal Reserve has been steadily raising rates. This year they paused in June, raised them 25 basis points in July, and paused again in September. But their September comments were somewhat hawkish, as they alluded to how stubborn inflation is, and the need to stay higher for longer.

The next meeting is in November… and what can we expect? Well, unless economic data changes (and it could – more on this in a second), most experts predict another 25 basis point increase. 

The good news here is that those same experts predict that is likely to be it. And that maybe some cuts could happen at some point in 2024. Now we can’t get too excited about that, because even if cuts do come, they will almost certainly come sloooowly, likely 25 basis points at a time. So the rate we’re seeing right now is likely to be very close to the rate we’ll be seeing in a year. 

**Key takeaway for that = don’t let rate expectations drive your near future decisions. You’re not going to miss out on a significant rate drop.    

Now, I did say “unless economic data changes”, and this is where I’ll make a prediction – we will see economic data in the near future that shows the previous rate cuts are (finally) working. 

This is gut feeling, but I’ll bet you share my feeling: all the data I’m reading says the economy is strong and things are just swell… but does it feel that way to you? I’m seeing a lot of spending by older folks for sure, but younger people? Not so much. And I feel this will be reflected in future data. 

Does that mean a November pause as well? I sincerely hope so. As a B2B lender, I hear small businesses loud and clear: they want lower rates, and they want them now. I just hope the Federal Reserve is listening. 

So that’s my optimistic outlook – hopefully a November pause, but if there is an increase, it’ll be 25 basis points. Then a long period of nothing. Then maybe, just maybe, we start to see some small cuts later next year. 

Stay the course folks.

Something really big happened at the last Federal Reserve meeting on June 14th – rates did not go up for the first time since January 2022. They didn’t go down either – they just held fast. 

However, let’s not break out the party hats yet – in reading the tea leaves from statements made, it seems more hikes will be coming. However, it also seems the shock and awe type increases of 75 basis points and such are over for the time being. That’s good news. We can deal with smaller hikes, but those big ones are tough for everyone.

This tells me that rates may not return to the lows we experienced through most of the 2010’s for a very long time, if ever. During those years, it was incredibly inexpensive to borrow money. However, simple logic tells us that the cheaper something is, the less value it has. In this case, we’re talking money, so if you make money cheap, that can technically be a precursor for inflation. As a result, we’re going to be living with rates higher than recent times, but definitely not out of line historically either. 

This also tells me something else: you can borrow with confidence that you won’t be left out in the cold. Even if you borrow and lock into a rate, and sometime late next year rates begin to fall, they aren’t going to fall by an amount that’s going to make a huge difference to most readers here – 25 basis points at a time (which will likely be the amount of any 2024 decreases) is not going to make much of a difference unless you are borrowing in the millions/tens of millions.  

I’ve been saying this for a year-plus now – if you need it, go buy it. That’s good business. 

Ok, onto other news: I said this in my prediction post: “If they don’t implode, I like the Brooklyn Nets to win it. It’s not fair to pick a second team and have it count, but if it did the Denver Nuggets are a dark horse.”

Well, I’m now counting it. Because the double dip happened: if you follow basketball at all, you know the Nets DID implode, and the Nuggets won it all. So that was a pretty good prediction. 

And let me sign off with this: my Braves prediction is looking strong so far.  

Fletch,

I’ve been reading your thoughts about rates but I’ve been holding off getting new gear because I was too scared to borrow when rates were rising. I clearly should have a year ago but that’s hindsight. But today even though I really need some new machinery I’m still hesitant to commit to a long-term loan because rates could start falling. A friend of mine suggested I lease but I’m hesitant there too. Can you talk me into it?

First of all, smart move in asking The Lease Guy to talk to you about a Lease!

But yes I do understand your dilemma and it’s not uncommon. For people who have held off buying equipment the past year, they are almost to the point where they feel like they must stay the course.  

I will say I don’t think rates are going to lower, so you’re probably safe in just financing what you need. But you asked me to talk you into a lease, so here goes:

Get an FMV Lease, which stands for “Fair Market Value” lease. Take it out for 24 to 36 months. This means you aren’t locked in as long as a traditional loan, but most importantly, it gets you the equipment you need right now. And at the end of the lease, you have the option to buy the equipment at the fair market value. If rates are lower and you like what you have, go ahead and buy it. If neither of those things are true, hey, lease another. 

Now, because an FMV lease might be an operating lease, it could be structured so it isn’t on your books as an asset, meaning you can’t take a Section 179 Deduction on it. However, as it IS an operating expense, you can deduct the lease payments on your taxes. While it’s not as big as Section 179, it’s still pretty attractive.

Plus, with the FMV lease, you’re really only paying for the portion of the equipment’s life you are using, which means your payments are going to be pretty manageable.

Lastly, whatever your feelings are, it’s never a good idea to “need” new machinery or equipment, but not get it. It’s hard to competitively operate that way. So if the lease gets you the equipment now, and you feel good about the financials, there’s almost no downside.

Hope that helps! 

I appreciate (and somewhat share) the optimism, but my initial response to that is “not so fast”.

On February 7^th 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.

2022 was the year of inflation and interest rate hikes, both of which I’ve discussed at length in this blog. But there’s no getting around it – high inflation and rising interest rates (which are rising to combat said inflation) have affected every business out there. 

So with that in mind, here are a few year-end strategies that can help your 2023 start off right. 

1. Remember That Rates Are Likely to Keep Rising

I’m confident that the rates we have right now will be lower than any rate we see in 2023. Hopefully we won’t see several 75 basis point increases in a row anymore, but the scenario of “no 2023 increases” is extremely unlikely. And decreases are even more unlikely. 

This means you really can’t afford to hold out for lower rates if you need to replace machinery or make improvements. Because you will be holding out for a looong time. Which brings me to… 

2. Do More Than Your Competition.

Think about cyclists racing – the prevailing thought is you separate yourself from others on the difficult hills, and not the flat ground where it’s easy to ride. It’s the same right now for businesses.

In a booming economy with low rates, everyone can be a competitor. But it’s in the more difficult economic times that companies really make strides and pass others. Let everyone else turtle because rates went up a point or whatnot. Demand is still strong for most industries, and the companies that can best meet that demand will be the winners once the economy turns (and it always turns).  

3. Don’t forget your Section 179 deduction. 

Listen, I know taxes and “the IRS” are the last things you want to hear right now, but hidden within those words is the single best business tax deduction possible: Section 179.

Almost every piece of tangible equipment you bought for your company in 2022 is likely eligible for a full Section 179 deduction. And the deduction is good up until $1.08 million dollars of purchases is reached. 

For small businesses, that prettymuch means your entire years’ worth of equipment purchases can be deducted (as opposed to depreciating a small amount each year). Depending on your revenues, that can make a massive difference in your bottom line right now. And what company out there doesn’t need the money right now?

2022 was not easy by any stretch. But we’re all still here and 2023 is coming no matter what. This is what we have to work with, so let’s make the best of it. 

Happy New Year everyone! 

But the important one is rates. I mentioned back in January that rates will likely rise all year, and that has been spot on. If you were thinking about financing equipment in 2022 and locked in a nice fixed-rate, you’re in good shape.

So here we are, well into the third quarter of 2022, and I want to say that even if you didn’t get in before rates rose, it’s not too late. Because even though rates just went up again, I predict rates will continue to rise for the balance of this year, and well into the next. 

Now this is hardly an outlier prediction. Most economists and experts who watch this a lot more closely than I do are saying the same thing. That said, hopefully the biggest hikes are going to plateau soon, and then we’ll see some smaller ones. And then we’ll see a leveling off, where rates will probably hold steady for a while.   

What this means to you, dear reader, is this: for the next few quarters, whatever the rate is today is as low as it’s going to be for quite some time. If you are looking to finance equipment or borrow money in any way, NOW IS THE BEST TIME. 

Now some more good news, and this is from a big picture perspective sense: No matter what happens to rates, they will still be quite low in a historical sense. I talk to some older executives who recall borrowing at much higher rates in the 1990’s and being happy with it. And even in the early 2000’s, rates were nearly double what they are now. Just food for thought.

Anyway, there’s my prediction for the rest of 2022 and into 2023. Borrow now to get your best rate, with “now” being almost anytime in the next year. But of course, the sooner the better. 

Now, let’s go Mets!

A customer was in the process of buying a new machine they needed, and the rate hike happened right in the middle of their “which of these two models should we buy?” discussion. And since like most businesses they were going to finance the machine, they briefly discussed not going through with the purchase.

The interesting part was it wasn’t the actual rate itself that caused them to consider bailing (even with the hike, rates are still historically low) – it was the fact that since they (in their words) dragged their feet on picking a model, they “lost”. Had they decided just a week earlier, they would have gotten a lower rate.

They decided they still really needed the equipment, so they went through with it. But in talking about this, I made them feel better by telling them rates were almost certain to rise again and again, well into the next year or more. So looking at it THAT way, well, they locked in before more increases.

That means they actually won. Imagine that? 

Look, I know I’m in equipment financing, and I’m going to be bullish on financing no matter what. But I bristle at a reluctance to finance because of emotional reasons like “oh, we could have paid less had we done this last week”. To me, that’s silly. 

This is because while the “we could have paid less last week” is technically true, it’s a blip in the overall success of a business. If you need the equipment, you need the equipment, and that should come first. As I mentioned in another post, people and companies still need things done. Are you planning on doing them, or not?  

I’m not telling you everything is rosy and not to pay attention to rates. If you are thinking about an equipment purchase, you’d be wise to do it before the next Fed meeting (July 26-27), or definitely before September’s (September 20-21).

But if you need equipment after that, don’t sweat it. You’re still going to lock in before rates go up more. Plus, you are going to get equipment that matters to your business. And that’s a win anytime! 

The pandemic is still hanging in there, but we’re moving forward to some sense of “normality”. But this normal is indeed a “new” one.

Regardless of where the economy is going (and we’re quite optimistic here), it’s clear that on the whole, everything is going to cost more for the foreseeable future. 

There are many factors causing this: shortages of raw materials, shipping disruptions, a rapidly-changing labor market, and other pandemic-related factors. But (and this is good news) demand across most industries has held steady. The supply is a problem, whether that supply is goods or people to build/move them. 

And it’s simple economics that when there’s ample demand with a limited supply, prices must rise. This includes the price of goods (both new and used), as well as the cost to borrow (i.e., interest rates.)

Waiting is Costly

What this means for businesses is obvious. Waiting to buy needed equipment, be it vehicles, machines, software, servers, or anything else, means you will absolutely pay more than if you bought it right now. 

The cost of the equipment itself will be higher (both new and used). And rates will be higher too. So whether you’re paying cash or financing, waiting is costly. 

No matter what it is you are looking to buy, right now is the lowest price you are going to see, and likely the lowest rate as well.

Locking in with fixed-rate financing is easily the best way to protect yourself from paying more than you should. Again, this is simple economics.

I know, there’s an elephant in this room. I can hear it now: “Chris, you work for an equipment financing company. Of course you’re saying to finance now.”

Well, yea. But is anything I’m pointing out inaccurate? Do you truly feel prices on anything are going to drop? If you think they are, then I have a bridge to sell you (note: act now, as the price of that is going up too.)

Seriously, the die has been cast. We can argue as to the causes, but the fact is, this is our business climate, and smart companies don’t complain – they act. 

I’m writing this in September of 2021, and I strongly feel that whenever you are reading this – be it now or three years from now – today will be the lowest price and rate you will see on whatever it is you want to buy.

Despite this, I am very bullish on the future. Demand for almost everything remains extremely strong. The smart companies will do fine. 

Again, financing equipment you need (or are going to need) right now is your best hedge against rising prices and rates. Locking in is a sound strategy. 

Curious if you can be pre-qualified? We can do that in two minutes right here.

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I just read an interesting blurb about

So who’s right?

I say “who cares?”

Whether it’s three hikes, four hikes, five hikes, or even just two hikes, the fact is rates are fully expected to go up in 2018. And that isn’t welcome news to borrowers. Because like it or not, it will cost you more to borrow money next year. And that includes financing equipment. You will simply pay more for it if you wait.  

That’s why I’m “emergency blogging” today. If you had your eye on a piece of equipment, DO NOT WAIT to finance or lease it. The only thing waiting gets you is a higher monthly payment. That’s it.

This has an increased impact here in the last few weeks of the year. If you lock in a great fixed rate NOW, you will be unaffected by rate increases in 2018 and beyond. Plus, you can take a full Section 179 Deduction on qualifying equipment this year.

There’s nothing to think about. I know it’s the holiday season, but somewhere in between decorating the office and the company party, get that piece of equipment you wanted.

The clock is ticking.