Interest rates will be going up. The question is when will that happen? Most commentators believe that the Fed will raise rates in 2015, likely in the middle of 2015. Some factors that could result in higher rates sooner are:
- Jobless rate was 6.2% in July 2014; down from 7.3% in July 2013 (the counter to this is that many employed people are underemployed/part-time);
- Inflation has picked up after being below the Fed’s 2% objective for two straight years; and
- The U.S. economy grew at a 4% annual rate in Q2 2014 after contracting in Q1 2014.
If the jobless rate keeps falling and inflation increases, then the Fed may increase rates sooner than expected. Current issues in the Middle East and Ukraine (and future events elsewhere) could change all of this, but business owners and investors have to carefully analyze what increased interest rates mean to them (currently and for the term of their current strategic plan), their competitors, their suppliers and their customers. Business owners considering refinancing should accelerate their analysis and lock-in the best debt financing terms (amount, repayment terms, covenants, and interest rate) available with their current lenders or seek new or additional lenders. Individual businesses may well decide that their current debt capital is acceptable. The issue is constant re-evaluation of each company’s necessary debt financing. Better to have an unused line of credit and not need it than to need a line of credit and it not be available. Companies looking to do acquisitions may want to accelerate those acquisition plans. Cheap debt will (unfortunately) not last forever. As with any well-run business, analyze the impact of rising interest rates on all aspects of your business. You don’t want to look back in late 2014 if the Fed acts early to increase interest rates and wish you had acted differently.