Know From a Pro: Interest Rates with Matt Hill

Learn about Rising Rates and How They Could Affect You

Amid a period of rising interest rates, we sat down with SVP Commercial Lending at Mabrey Bank, Matt Hill, to chat about the hot button topic. With an extensive portfolio of  clients throughout the region in a variety of industries, Matt is an experienced commercial lender, and has spent the last seven years of his career working at Mabrey.

1) How have the Federal Reserve’s interest rates changed in the last 12 months?

Since March 2022, the Federal Reserve has steadily increased their benchmark rate – the Federal Funds Rate – in order to ease record-high inflation. This rate has widespread effects on the economy and serves as the basis for most interest rates. The target range for the Fed Funds Rate has risen from effectively Zero in January/February 2022 to 2.25%-2.50% as of July 2022. This rate guides the interest rates all banks offer consumers and businesses on loans across the country.

The current pace of rate hikes is the fastest seen since the early 1980s, when the then-current Federal Reserve Chairman, Paul Volker, quickly raised the Fed Funds rate “breaking the back of inflation.”

We do need to be mindful that even in today’s rate environment – which feels (and is!) considerably higher than where we were one, two or even 10 years ago – rates are still near historical lows, especially when you compare them to the early 1980’s when the Fed Funds rate was nearly 20 percent!

2) What do rising interest rates mean for the economy?

Rising rates are intended to cool demand and tighten the overall economy by slowing spending and borrowing. The Fed Funds sets the interest rates Banks charge one another for overnight loans – these loans help Banks meet cash reserve requirements set by the Fed. The Fed Funds Rate essentially acts as the basis for nearly all domestic interest rates.

Higher rates put pressure on sectors of the economy – companies who rely on borrowing to fuel their growth, such as manufacturing and construction – which could ultimately lead to an economic slowdown, and possibly a recession. The breadth and depth of a potential recession is the great unknown.

3) How can a change in interest rates affect me or my business?

Rates are meant to cool demand. They do this though raising the cost of borrowing which may have your business thinking (and rethinking!) hard about the opportunity costs associated with that potential new piece of equipment or vehicle purchase.

On a personal level, interest rates for cars, homes and credit cards are on the rise. Existing loans that carry a fixed rate (most home and auto loans) will not be affected, however it’s important to be mindful of loans that may be subject to adjustments in its interest rate (such as credit cards or Adjustable Rate Mortgages).

4) Is there anything I can be doing right now to take advantage of the interest rates?

Even if you’ve not been a position to lock in an interest rate during this period of historically low interest rates, fixed rate options are still available and at historically low rates! Many business owners and consumers have been conditioned to ultra-low rates. Some might have never experienced a more-normalized interest rate environment. Despite their recent rise, rates are still historically low.

Current Fed Chairman Jerome Powell has signaled – similar to Volker – that the Fed is committed to fighting inflation. As long as inflation persists, rates will continue to rise. How long that takes – and how high rates will ultimately go – is the great unknown.

If you are holding excess cash – and many are – deposit accounts are beginning to offer rates that aren’t zero! If possible, consumers should continue to build their emergency fund in a high-yield, easily accessible, FDIC-insured account such as a Money Market or Savings account, both of which Mabrey Bank provides. Yes, it won’t outpace the effects of inflation, but there is value in security and liquidity. An emergency fund should be equal to 3 to 6 months of your current expenses. Be sure you look at this figure periodically to ensure the balance of your emergency fund has kept up with inflation too!

5) Do you foresee interest rates continuing to rise in the near future?

There is a growing fear that the swift rise in rates could ultimately throw the economy into a recession. Obviously, the aim is to avoid this altogether, but just how deep and long any potential economic slowdown may be is the unknown. Ultimately a rising federal funds rate will lead to slower loan demand.

Once the Fed has conquered inflation (bringing it down to its target levels), this slower loan demand will eventually lead to the Fed lowering its funds rate again in order to encourage borrowings and spending – driving growth within the economy.

Main Office - Bixby Corporate 918.366.4000 Mon-Fri, 9am - 4pm Sat-Sun, Closed