Home buyers, entrepreneurs, and public officials are facing a new reality as they wait for borrowing costs to decrease: the wait is likely to be long. Governments are paying more to borrow money for infrastructure projects, developers are struggling to find loans for real estate investments, and companies are forced to refinance debts at higher rates, which could lead to employee layoffs.
Despite the Federal Reserve’s plan to end its increases in short-term interest rates, long-term borrowing costs continue to rise. This realization suggests that the economy may not be able to avoid a sharper slowdown.
“It’s a trickle-down effect for everyone,” says Mary Kay Bates, CEO of Bank Midwest in Spirit Lake, Iowa.
Small banks like Bank Midwest are at the center of America’s credit crunch for small businesses. When the Federal Reserve’s benchmark interest rate was near zero during the pandemic, banks like Bank Midwest could offer loans at low interest rates. However, as the Fed’s rate started increasing, the value of Bank Midwest’s securities portfolio fell, making it more expensive to borrow money. This resulted in higher interest rates for borrowers and careful lending practices by the bank.
Entrepreneurs like Liz Field, who owns a bakery called the Cheesecakery in Cincinnati, are also feeling the impact of high interest rates. Field borrowed money to expand her business but saw her monthly payments increase when interest rates climbed. As a result, she had to cut her employees’ hours and delay plans to open more stores.
According to analysts, interest payments for small businesses are expected to rise next year, which could pose challenges for entrepreneurs. This comes at a time when many businesses, especially start-ups, are already struggling to survive.
High interest rates also affect other industries, such as agriculture and residential construction. Farmers are facing lower commodity prices and higher borrowing costs for new equipment. Builders are offering discounts to sell or lease units as high interest rates suppress home sales. The scarcity of capital could prevent the growth of new businesses and the development of affordable housing projects.
Consumers, on the other hand, have continued to spend, relying on credit card debt as savings dwindle. However, as wage growth slows, this trend may change, affecting industries like car dealerships, where the average interest rate on auto loans has reached its highest level in decades.
The era of higher interest rates is less favorable for those who rely on borrowing for day-to-day needs, especially as housing costs rise and wages remain stagnant. Financial advisers predict that low-income individuals will be particularly affected by the combination of higher interest rates, rising rents, and limited wage growth.
