The latest (and biggest) Fed rate hike is sure to cause more pain

The Federal Reserve Board of Governors voted unanimously to increase the rate of interest paid on reserve balances by 0.75% to a range of 1.5% to 1.75%, effective June 16, 2022. It is the largest increase by the Federal Reserve since 1994.

Over the past several months, our blogs and articles have been predicting that an interest rate hike is on the horizon. When the Fed raised rates by 0.5% in May of this year, we commented that the increase was not meaningful and that larger increases were needed to combat the rate of inflation that was reported at 7%-8% at the time – but in fact was higher than So much.

Raising interest rates is a tool to fight rising inflation, which all Americans feel. Perhaps the ruling party will want to avoid this increase until the midterm elections in November, as no party in power wants a weak or negative economy just before the midterm elections. But with more and more families experiencing the effects of the actual level of inflation, and the media bringing the public’s attention to the true level of inflation, the Fed could not hold out any longer. So they put in a 0.75% increase – with clear signs that more increases are to come.

Possible long-term effects

There will certainly be a significant negative impact on businesses, including real estate and the stock market, as a result of higher interest rates. So far, the economy hasn’t shown how weak it really is. Based on my interviews with several bankers as well as borrowers, federal auditors do not force banks to deal with non-performing business loans. Trillions of dollars in PPP loans and extended unemployment checks that the government has printed and loaned or given to businesses and individuals over the past year have helped this situation.

Two things are clear. First, the biggest piece of fake news we’re getting right now is that inflation is between 7% and 8%. Housing, gasoline, and food are three of the biggest ingredients in an average budget. Which of these three works with less than two digits? Nationally, gasoline is up 42% since April. Housing costs in areas like South Florida have doubled over the past year.

Second, we are facing a perfect storm of factors that will create a recession, or worse. These are the main culprits:

1. Inflation is out of control and there is no real end in sight.
2. Interest rates should be raised far beyond what the Fed has done so far to effectively combat inflation.
3. The impact of China’s “zero tolerance” policy on COVID-19 has locked hundreds of millions of Chinese workers in their apartments over the past six months. These workers were not making the goods we need to run our economy. Within the next six months, when these goods will no longer be available at any price because they do not exist, this impact on our economy will become very clear.

As the impact of these economic changes affects an increasing number of families and businesses, more and more entities will experience financial distress. We are already seeing companies, real estate investors and entrepreneurs who are experiencing a steady increase in distressed assets. Companies are going from 30 days receivable to 60 days, now 90 days are over and debts are increasing. As interest rates and inflation continue to rise, debt will also continue to be a problem for all business entities.

The stock market is clearly under pressure as well, with the S&P 500 officially slipping into a bear market on June 13, before the latest rate hike by the Federal Reserve, and the Dow close to joining it the day after the rate hike. announced.

Steps to consider

Business and real estate owners are advised to think about what the immediate future may bring to our economy and prepare for the inevitable. Now is the time to mitigate distressed assets. When companies begin to accumulate significant discrepancies between their collections against their debt, it is time to consult with a professional who specializes in reducing troubled assets early on to avoid having to fill out Chapter 11 later. Carefully evaluate your business as well as your personal cash flow.

Consumers and retirees, as well as business owners and entrepreneurs, should consider working with a financial planner, tax professional, or attorney who can help prepare for the impending recession before it arrives. Early setup and liquidity appear to be convincing moves at this juncture.

The coming recession won’t surprise any of us. Now is the time to get ready for it.