Jack felt like he’d been gut-punched.
Just a week prior, he and his partners agreed to purchase a new heavy excavator that would allow their small company to expand its offerings into areas a local competitor was starting to abandon.
Jack (whose name was changed for this story) and his partners had their preferred choices narrowed down to two models, and agreed to finalize their decision the following week.
However, they weren’t paying attention to the news. The day before their meeting, on June 15, 2022, the Federal Reserve raised interest rates 75 basis points (.075). This means interest rates on all types of loans went up.
What that meant to Jack was that the excavator, which they intended to finance, would cost them more money, simply due to the week they were buying it.
To hear Jack tell it, his company “lost,” stating, “If we only paid attention, we’d have sped things up and purchased the machine quicker and got in under the wire. It feels like we’re just wasting money now.”
The overwhelming “what if” feeling was so strong that Jack and his partners almost pulled the plug on their plans. It took some serious thinking on the bigger picture that they finally agreed it was still worth it to go ahead with their purchase, despite the higher rate.
This story is not unusual in an environment like we have right now. When rates go up, lenders see a sharp decrease in loan applications and spending (which, of course, is the entire point of the Fed raising rates).
Obviously, some of the “pullbacks” are completely justified – if the financial aspects of any loan entirely depended on the rate being a certain number, and that number goes up, it clearly makes little sense to move forward.
But it’s the “we lost” reason that needs some looking at.
Historically, the interest rate pendulum swings very slowly. Periods of rising and falling rates take months, and in most cases, years, to peak and reverse. To listen to what the Federal Reserve is saying right now, the recent rate hike is very unlikely to be the last one. Almost every economist agrees with this – we are likely going to see rates rising for the foreseeable future.
What does this mean for the “we lost” thought process? It means it will happen again, and again, and again.
But that also means the reverse is true. Say you were in Jack’s shoes and moved forward even after that .075% increase, what does that mean for the next three rate increases?
Doesn’t it mean you won? Really, think about that for a minute.
Right now, even with the most recent increase, interest rates are still historically low. We’ve enjoyed incredibly low rates for almost a decade now.
For those who remember, the federal funds rate was over 5% for most of the '90s. And the first decade of the millennium had ups and downs, with rates around 4-5% for nearly half of it. So even with recent increases, we are nowhere close to that right now (at this writing, the Federal Funds Rate is still under 2%.)
Yes, rates are higher than they were a few months ago. And in a few more months, they will likely be higher still. It may be a long time before we get back to 2020 rates, if we ever do.
The cautionary tale here is not to let your mindset be too affected by missing a date and paying a higher rate than yesterday. By all accounts, there’s still a lot of “I got in when it was lower” winning to be had for the rest of 2022 and into 2023.
The current business climate is challenging enough but making (or not making) decisions because of what could have happened yesterday doesn’t make a lot of sense. Yesterday is over-focus on tomorrow instead.
Despite being 0.75% higher than before, the rate we have right now is still likely to be the lowest one we will see for quite some time. Whether you win or lose in this environment is 100% perspective-based action.
Chris Fletcher is the vice president of National Accounts at Crest Capital, which offers small and mid-sized companies financing for new and used equipment, vehicles and software. Visit them online at www.crestcapital.com
All views expressed in this article are those of the author and do not necessarily represent the policy or position of Crest Capital and its affiliates.