Federal Reserve policy economic outlook

The Federal Reserve is again in the spotlight this week with another rate hike to try to squash the inflation monster. Prices are rising at just over 8% year over year, while wages are rising at an annual rate of 5%, which is a losing proposition for workers and consumers. The Federal Reserve raised interest rates this year to slow spending. These interest rate increases have led to higher mortgage rates, but overall consumer spending remains strong and that’s a problem. 10-year Treasuries are now yielding 4%, and the cost of federal debt financing is rising. The cost of small business loans has tracked this rate for 48 years. Historic Low Now Due to the 0% rate policy being abandoned, owners paid an average of 19% for their short-term loans in the early 1980s. Now the rates are 4%-5%, but they are going up as the Fed raises its rate. So far, the percentage of owners who complain that they didn’t get all the credit they wanted and the percentage who report credit as their most important business problem is historically low. But that is likely to change as interest rates rise and the Fed stops buying Treasuries.

Small business owners aren’t entirely confident that these issues will be successfully resolved any time soon. When asked about working conditions after six months, only 8% said “better,” while 56% said “worse,” among the weakest readings in the survey’s history (48 years). Projected sales are similarly dismal, with real sales volume expected to rise 20%, and 40% forecast to decline. Only 4% thought the current period was the right time to expand significantly. In 2018, 36% thought so. With a reminder that small businesses produce about half of our GDP and employ nearly a large share of our workforce, that’s not very promising for the rest of the year.

From an investor’s perspective, if one can earn 4% with no default risk by lending money to the government, then lending money to fund small business expansion should provide a much higher return to offset the higher default risk (and similar loans). ). And the investment project should provide a much higher return on the money invested (cost reduction, higher sales, etc.). A project that generated a 5% return might be worth financing with a 4% bank loan, but not a 6% loan. Higher interest rates reduce the number of profitable investment options. And for consumers, the cost of financing large purchases (cars, homes, etc.) is also rising, slowing spending.

So, inflation is the biggest problem facing small business today. Second it goes to the shortage of qualified workers, where job prospects and employment plans remain historically high (consumer spending has not collapsed). Federal Reserve policy that raises interest rates will dampen spending in many sectors, and consumer spending will decrease (that is the goal), especially as unemployment begins to rise. These are the economic forecasts for the next 12 months.

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