On Wednesday, the Federal Reserve raised the benchmark borrowing interest rate to a range of 2.25 to 2.5 percent, marking the fourth rate increase this year. With the New Year on the horizon and more rate increases expected in 2019, now is an important time for business owners and consumers to consider financial resolutions that could impact their bottom line next year.
For businesses, an increase in interest rates could create unexpected and expensive changes to their current loan structure. A few resolutions for business owners to consider are:
1.) Make Investments Soon: If a business is considering a large purchase or expansion, now is the time to do it before rates rise again. For business owners, time is of the essence to avoid increased interest payments that could come with future hikes
2.) Watch the Market: In addition to the rate hike, the Fed also introduced the short-term inverted yield curve, which means short-term interest rates are higher than longer-term ones. Business owners should make a resolution to watch the market and evaluate how changes will influence their current and future investments.
3.) Continue the Conversation: UMB researches what is happening across the economy and within different industries to understand potential impacts to its clients. Business owners should make a resolution to talk to their banker at the end of the year and learn how economic trends and forecasts can help them strategically prepare for their financial needs in 2019.
Consumer Budgeting Strategy
Increasing interest rates can impact the ways consumers budget for 2019—particularly, if they are planning to make any large purchases or refinance loans. As consumers begin planning for 2019 there are a few items they should consider:
1) Make the keychain purchases soon: Consumers will likely see higher borrowing costs throughout 2019. Increased interest rates on mortgages and car loans will result in higher monthly payments for new loans or adjustable rate loans.
2) Lock in fixed interest rates: Consumers should also consider converting variable rate loans to fixed rate loans. Those with variable rate credit card balances may have a harder time paying them off, because more of the monthly payment will go toward interest. If the option is available, consumers may want to consider paying off revolving debt and locking in fixed interest rate while rates are still low.
3) Consider refinancing early in the year: For those who have been considering refinancing their homes, but haven’t done so, now is the time. Rates are still within historically low levels, but we anticipate continued upticks in 2019.
View from an economist
This 0.25 percent increase brings the number of increases in 2018 to four, and raises the benchmark interest rate to a range of 2.25 percent to 2.50 percent. This is the highest the benchmark has been since 2008 – and notably, the Fed lowered its 2019 expectations from three hikes to two hikes. As financial markets sell off and economic growth forecasts show signs of slowing, the Fed may pause the hiking cycle and exercise what we call a tactical stall.
Jim Patterson is president of UMB Bank Arizona.