By Rocco A. Carriero, MBA, CRPC®, APMA®
Strategies for when Rates Go Up, Down or Sideways
Need cash access but are reluctant to make a move? It’s easy to see why. There is a lot to consider such as geo-political risks, tariffs, unemployment, consumer confidence and inflation which is hovering around 4%, roughly double the Fed’s preferred 2% rate. Technological advancements, such as Artificial Intelligence (AI), are reshaping jobs and promising transformation, adding pressure on business owners considering hiring and expansion decisions. In the midst of this, we have a new Chairman of the Board of Governors of the Federal Reserve System (the Fed) in Kevin Warsh. While Warsh must guide the markets between managing inflation and spurring economic growth, with so many macro-economic factors at play, which is the best course for you and your business?
In his first press conference as Fed Chairperson, Warsh held rates at the 3.5% – 3.75% range. Further, after initially saying there was room to cut, the current climate now forecasts a hike before year-end but no one’s saying how high. This is just one part of the story. The U.S. economy is nothing if not dynamic and we should expect some changes from the Fed as Chair Warsh assumes his position. As the Fed can address inflation, we may see quantitative easing and the government purchasing Treasurys to lower rates. On a $350,000 loan, after a half-percent interest-rate drop, buying power rises by about $17,500. It goes the opposite way when rates rise. If you’re concerned about meeting business cash needs, there’s a range of solutions you can utilize in an environment where rates may be going in an unfavorable direction. A good place to start is with greater capital control. Consider the following:
- Know Your Liquidity: Take inventory of all cash and cash equivalent positions.
- Consolidate Cash: Consolidate cash balances to reduce service fees.
- Revisit Your Supply Chain: Will suppliers extend payment terms?
- Consider Technology: Can automation make your business more efficient?
- Foreign Exchange: Automated FX solutions can streamline multiple-currency management.
- Know Your Credit Score: A good credit score will give you greater leverage with lenders.
- DIY: What is your ability to self-fund to mitigate financial risk?
Time for a Line of Credit?
It’s often wise to get a credit line long before one’s needed but you must understand the terms before doing so as they come with risks. Often issued when interest rates rise, credit lines are short-term “demand loans,” generally callable at any time for any reason. A securities-based line of credit provides borrowing against eligible, non-retirement investment accounts. It features variable interest rates, flexible repayment options (only monthly interest) and no application, origination or annual fees. A home-equity line of credit (HELOC) allows borrowers to use available equity in their home. Qualified borrowers may receive such benefits as credits toward closing costs.
Bottom line: Economic indicators have been sending mixed signals. While interest rates are arguably the single, most important economic number, it’s difficult to say in which direction inflation will head based on the price of oil and other geo-political factors. However, if you’d like to see how a rate-strategy discussion can help you to better manage your business, contact our office.
Rocco A. Carriero, MBA, CRPC®, APMA®
Private Wealth Advisor
President & CEO
Rocco A. Carriero Wealth Partners
A private wealth advisory practice of Ameriprise Financial Services, LLC
Rocco A. Carriero is the author of: Three Cords Approach to Life and Wealth Management for Business Owners. For a complimentary copy, please contact our office: 631-283-8482.