What Does Fed’s latest interest rate hike mean for US economy?

The latest 75-basis point rate hike from the Fed, decided on Wednesday, July 27, 2022, will make business debt of higher cost as the monthly payment on loans will be a bigger, if manageable, drain on cash flow.

But higher debt interest payments are less significant for business owners than what the Fed’s fight against inflation may cause: a recession. US banks will all tighten lending requirements for small business in a weaker economy.

This is the latest in a series of rate hikes intended to cool the economy and contain US hot inflation. For all Americans, higher interest rates carry weighty financial implications. Main Street business owners are not an exception, as the higher interest rates will flow through to the cost of business loans from lenders including national, regional and community banks, as well as the Small Business Administration’s key 7(a) loan program.

The biggest issue is a business lending market that may quickly dry up as banks pull back on loans to conserve capital and limit risk, and an increasingly smaller percentage of business owners meet stricter credit requirements.

The Federal Reserve is likely not done yet with its rate hikes after the Wednesday decision, with additional increases expected again in September and later in 2022.