FED RATE INCREASES WILL IMPACT COST OF BORROWING FOR BUSINESSES

This week, the U.S. Federal Reserve (“Fed”) increased the Federal Funds Rate to a 22-year high, bringing its key rate to 5.25% – 5.50%. The Federal Funds Rate impacts interest rates, and thus the cost of borrowing across the economy. For businesses, the relationship between the current Federal Funds Rate and the expected cost of borrowing can be explored by the relationship of the Fed US Treasury (UST) Rates, the Prime Rate, and Small Business Administration (SBA) rates, summarized as follows:

• Federal Reserve Interest Rates: An increase in the Federal Reserve’s benchmark interest rate raises the cost at which banks can borrow money from the central bank, with US Treasuries (“USTs”) that have maturities less than 1-year often serving as a decent proxy.

• Prime Rate Impact: The Prime Rate, which is closely tied to the Fed’s policy rate, tends to rise in response to Fed rate hikes. It serves as a baseline for many lending products across the economy.

• SBA Rates Impact: As the Prime Rate increases, borrowing costs for businesses rise, making loans and credit more expensive, potentially affecting investment decisions and overall economic activity. Businesses can often view the various SBA rates as a base example for the range of rates expected (note – these rates will vary based on the amount borrowed, the risk or credit profile of the individual institution and industry, the term of the loan or credit, and the structure of the borrowing).

In summary, interest rates impact borrowing rates by influencing the cost of funds for lenders, reflecting inflation expectations, accounting for credit risk, and responding to the overall economic conditions and demand for credit in the economy. Changes in interest rates set by the central bank can have widespread effects on borrowing costs for individuals, businesses, and the overall economic activity in a country.