Laws & Legislation

 

07 09 2015

Predict Federal Interest Rate Increase

07 09 2015

Trying To Predict The Fed’s Next Move

Owners looking to obtain a business loan or other alternative financing options need to be aware of the larger trends shaping national business affairs. For instance, many expect the U.S. Federal Reserve to raise interest rates, but no one is sure when this will happen. After postponing the decision at its June meeting, the Fed committee tasked with raising the rate left the public wondering when exactly this would happen.

The Fed has kept the interest rate at near zero since late 2008, and market watchers are trying to predict when the central bank will raise its benchmark short-term interest rates. The CME Group FedWatch, an index for tracking market reaction based on changes to the target rate, showed the odds of a September rate hike dropped to a 12 percent likelihood, while a December hike received a 49 percent chance and January 2016, for now, seemed the most likely at 66 percent.

The committee in charge of determining when to raise these rates will be weighing many factors when making their decision, including employment rates, manufacturing output, the strength of the dollar and the Greek debt crisis. These variables, some positive, some negative, are contributing to an inability to accurately forecast the Fed’s next step.

Job growth

The unemployment number decreased to 5.3 percent, the lowest number since April 2008. While this should be positive news about job growth, it instead came with a report that 432,000 people stopped looking for work. While the jobs number is not the primary factor the Fed will use when determining when to raise rates, it’s one of the most significant variables.

Manufacturing

June experienced the 30th consecutive month of expanded economic activity in the manufacturing sector, according to the Institute for Supply Management June 2015 Report on Business. The ISM’s index recorded manufacturing rates expanding by 53.3 percent, representing an increase in 0.7 percent. Any reading than 43.1 indicates expansion, which means the 53.3 percent reading is a signal of strong growth and promises steady economy performance. With increased manufacturing rates, businesses are producing more goods for consumers, which involves these companies restocking inventories and continuing the cycle. It demonstrates not only strong business output, but strengthening consumer spending power as well.

Greece

According to CNNMoney, Federal Reserve Chair Janet Yellen cited the ongoing Greek debt crisis as influencing the decision.

“To the extent that there are impacts on the euro-area economy or on global financial markets, there would undoubtedly be spillover to the United States that would affect our outlook as well,” said Yellen.

However, others maintain the U.S. economy is rather insulated from the Greek markets, and a CNNMoney survey of economists revealed many don’t expect a direct impact to delay a rate hike. Despite not having direct exposure to Greece, Europe is intricately linked with the country, and if the euro is negatively impacted, it could be felt here in the states.

While the Fed’s interest rates primarily affects short-term lending between banks and monetary policy at the national scale, many small businesses are also impacted by its decisions. As the Fed raises and lowers its interest rates, many other lending institutions also follow suit and increase or decrease their prime interest rates, The Los Angeles Times reported. This isn’t a written rule, but a general trend that many banks and lenders tend to follow.

Small-business owners holding off on expanding into new territories and hiring new employees should consider all available indicators that factor into their financing needs. While lending among banks will be greatly impacted by the impending Fed rate hike, small-business owners can rely on other lending options, such as alternative financing to find working capital. Trying to decipher and analyze the financial tea leaves can be next to impossible, especially when small-business owners are wondering if now is the right time to find financing for business purposes.

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