Why corporate leaders don’t have to work up a sweat on the Fed’s “rejuvenation” and rate hike
What should be more of a concern for small business leaders – inflation or interest rate hikes? Given the Fed’s upcoming moves, what should business leaders do?
These questions come to my mind when I hear news that the Fed will start tapering off in January – cutting in half the monthly bond purchase program it launched at the start of the pandemic in early 2020.
In addition, the Fed is planning up to three rate hikes in 2022 and two more in 2023 and 2024, according to information CNBC. Meanwhile, consumer inflation rose 6.8 percent in November – a level not reached after 39 years Wall Street Journal.
For business leaders, inflation and interest rates are affecting their ability to survive the pandemic. That’s because more than 70 percent of small business owners said the rising cost of goods and services “has had a significant impact on their business in the past 12 months,” according to the latest Small Business Index report, dated October 13 and October 13th, 50 small business owners were interviewed.
Companies are taking many steps to counteract this impact. As wealth These include price increases (63 percent of respondents), downsizing (40 percent) and taking out a loan (45 percent).
This leads to my thoughts on the two questions at the beginning of this article.
What should be more of a concern for small business leaders – inflation or interest rate hikes?
Although the answer to this question varies from company to company, what the survey results suggest to me is that inflation is a bigger problem for companies as it forces them to make short-term decisions with negative long-term effects.
How come? Price increases can enable a company to remain profitable as costs increase. However, it can result in customers buying all or no more of their products, or consuming less than they would otherwise have. Price increases also increase the risk that some competitors with leaner cost structures will hold their prices – which leads to consumers flocking to cheaper competitors.
Downsizing is also a short-term tactic that harms businesses in the long run. When a company runs out of money, downsizing can be a necessary means of keeping the company afloat. However, such cuts demoralize and overload the remaining employees and can increase the likelihood of burnout. Should a company experience increasing demand for its products, it will have difficulty recruiting new employees in the current tight labor market.
The Fed’s tightening and rate hikes should be less of an immediate challenge for small businesses as long as they set interest rates on their loans. If they chose to borrow at a floating rate, these Fed rate hikes will increase borrowers’ interest payments when their lending rates are reset.
In theory, the Fed’s rate hikes should dampen inflation. But in practice they could only slow economic growth. This is because this year’s inflation is caused by a supply chain that cannot deliver enough of the goods and services people want to buy.
The lack of supply is due to many factors – most notably the inability to employ enough workers to manufacture goods, provide services, load and unload ships, and move goods from ports to warehouses, retail stores and consumers.
Interest rate hikes are at best a blunt tool in solving these supply chain problems.
Which leads me to conclude that unless they have taken out significant floating rate loans, companies should be more concerned about inflation.
Given the Fed’s upcoming moves, what should business leaders do?
If a company has borrowed at an interest rate that will rise when the Fed raises rates, its executives should either renegotiate the contract to fix today’s rates or repay the loan before rates reset.
Otherwise, business leaders shouldn’t worry about the Fed and instead focus on fixing their supply chain problems. This is a very difficult but more pressing problem. As I wrote in November, here are the main steps:
1. Measure the damage caused by the disrupted supply chain to your company.
2. Find the causes of the breakdown in your supply chain.
3. Forecast how long it will take to fix the broken links.
4. If you can’t wait, rebuild your supply chain.
With the Washington elections always in the foreground, I am confident that the Fed will not push the economy into recession by aggressively raising interest rates, and will be well aware of whether the increases will depress inflation. If any of these things happen, the Fed will back out.