Fed raises interest rates, costs small businesses more for loans

On Wednesday, February 16, the US Federal Reserve approved its first rate hike in more than three years, in an effort to allay concerns that inflation is choking economic growth. The measure raised interest rates by 0.25 percent to curb rising inflation, which hit a new 40-year high of 7.9% in February.

Fed raises interest rates

The announcement comes after the Federal Open Market Committee (FOMC) meeting, where participants submitted their projections of the most likely outcomes for economic growth, the unemployment rate and inflation for each year from 2022 to 2024 and beyond. Wednesday’s move is the first of several rate hikes expected in 2022, affecting consumers and small businesses alike.

Raising interest rates is the Federal Reserve’s best tool to combat record inflation, global supply chain disruptions and rising gas prices that are weighing down US budgets. Rising costs of food, produce and fuel threaten to offset the wage increases workers have seen in the past year. By raising interest rates, the Federal Reserve wants to encourage saving, and with less money circulating in the economy, inflation will eventually fall.

“We are deeply committed to achieving the monetary policy goals Congress has given us: maximum employment and price stability. In support of these goals, the FOMC today raised its key rate by 1/4 of a percentage point,” said Jerome Powell, chairman of the Federal Reserve.

Potential issues for wallets

The rise in interest rates raises some concerns about whether it could negatively impact small businesses in the post-covid era. Before COVID-19, interest rates lending banks to each other were close to zero. However, with the higher interest rates, stock prices can fall and the cost of borrowing money can rise.

Small businesses can also suffer from more expensive loans, higher credit card fees and slower business growth. An increase in interest rates would mean higher borrowing costs, making it a challenge for companies to buy inventory, buy new machinery and expand their business.

If not managed properly, it can discourage consumer and business spending. Higher interest rates would also mean that credit card debt, home loans and new mortgages also become more expensive.

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