The rise and fall in interest rates can have an impact on how businesses perform over the course of business cycles. The U.S. Federal Reserve has the dual mandate to promote stable prices and maximum employment. Apart from that, it is also about keeping moderate long-term interest rates.
If there is an increase in prices, the U.S. Federal Reserve would raise Fed Funds Rate. Or, if there is a rise in unemployment and economic growth falters then it would lower the Fed Funds Rate.
Interest Rates and Businesses
If interest rate rises then, it increases the cost of borrowing for businesses. And, not only that if the debt is already there on their books then interest costs also rise. This impacts their earnings potential. Businesses would also delay their expansion plans.
Certain businesses would find it tough to continue with their operations. As their customers would also feel the pinch. Demand for their products falls. And, businesses would take measures to reduce costs and that includes furloughs as well.
High-interest rates particularly affect small businesses and those businesses which were already in debt. Some would go out of business. For small businesses, it gets tough to continue their operations with limited Cash Flow.
And, at times, businesses have to raise prices to cover increases in costs. That affects the demand for their products.
On the other hand, if the interest rate falls, then it reduces the cost of borrowing for businesses. It makes it easier for them to take on new projects and service any existing debt. The extra savings can also be passed on to customers.
Lower interest rates also give a chance for unprofitable businesses to recover. When interest rates fall, it is mainly done to stimulate economic activity. Those companies that found it tough until now have the opportunity to bounce back.
In conclusion, we have covered here how the rise and fall in interest rates affect businesses. It impacts both businesses and individuals alike. Keep an eye on Federal Open Market Committee meetings to gauge an idea about where interest rates are headed in the future.
Apart from that, we can also track Yield curves as well. But, these show only the market expectations. And, expectations can go wrong.
