Fed Raises Interest Rates To 22-Year High, Credit Crunch Continues For Small Businesses

In an expected move, the Federal Reserve raised interest rates by a quarter of a percentage point (25 bps) at its Federal Open Market Committee (FOMC) meeting on Wednesday, July 26.

Recent indicators suggest that economic activity has been expanding at a moderate pace: job gains have been robust in recent months, and the unemployment rate has remained low. Still, inflation remains above the Fed’s 2% target.

To support its goals of maximum employment and 2% inflation rate, the FOMC decided to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 %, the highest rate in 22 years. In determining the extent of additional monetary tightening, the Committee will take into account the cumulative impact of interest rates, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

During his press conference, Chair Powell said the central bank no longer expects a recession to occur as a result of interest rate increases and suggested that the Fed could hike the key federal funds rate even further later in the year.

“My colleagues and I remain squarely focused on our dual mandate to promote maximum employment and stable prices for the American people,” Powell said. “We understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve. Without price stability, the economy doesn’t work for anyone.”

“We’ve covered a lot of ground, and the full effects of our tightening have yet to be felt. Looking ahead, we will continue to take a data-dependent approach in determining the extent of additional policy firming that may be appropriate,” Powell said.

Recent indicators suggest that economic activity has been expanding at a moderate pace, and growth in consumer spending appears to have slowed from earlier in the year. Additionally, higher interest rates and slower growth are weighing on business fixed investment. At the same time, wage pressures continue as the labor market remains very tight as the unemployment rate remains low at 3.6%.

Powell’s concern is that inflation remains well above the Fed’s long term goal of 2% over the 12 months.

“Inflation has moderated somewhat since the middle of last year. Nonetheless, the process of getting inflation back down to 2% has a long way to go,” he said. “We’re strongly committed to returning inflation to our 2% objective. My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes the purchasing power, especially for those least able to meet the higher cost of essentials like food, housing and transportation.”

With today’s action, the Federal Reserve has now raised its policy rate by 5 1/4 percentage points since early last year. The Fed chair acknowledged that we have seen the effects of policy tightening on demand.

Powell admitted that “the economy is facing headwinds from tighter credit conditions for households and businesses.”

The U.S. economy is solid, and the banking system is sound and resilient. Tighter credit conditions for businesses (and for consumers) will likely weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. However, the Committee remains highly attentive to inflation risks.

Businesses in search of capital are facing the highest borrowing costs in decades, and lending conditions are tight. Business owners must judge how well they are doing now and expect to do and decide whether now is the appropriate time for them to secure business loans for investment and growth.