With inflation hovering around its highest rate in 40 years, the U.S. Federal Reserve (the Fed) plans to continue raising interest rates into 2023. In order for long-term economic expansion to continue, Fed chairman Jerome Powell said recently that “...restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth.”
The central bank does this by changing the federal funds rate, its main tool for managing the economy. When you hear on the news about the Fed raising or lowering interest rates, they're actually deciding whether to raise or lower the federal funds rate. Or they may be talking about reducing bond purchases/outright selling—a practice known as quantitative tightening (QT)—which affects broader interest rates.
In contrast to the recent interest rate hikes, the chart below shows that the rate was lowered to nearly 0% in 2020 to boost the economy at the beginning of the pandemic.
Rate adjustments like these influence nearly all borrowing costs, from how much you owe on your credit cards to mortgage rates, auto loans and business loans. They also shape broader decisions made by companies, like how many people to hire or whether to raise prices, and have a material impact on debt servicing costs, which in turn forces companies to cut operating expenses to maintain profitability and cash flow.
How Does the Federal Funds Rate Affect You?
The Fed plays a two-part role:
- Ensuring price stability (ie., low inflation)
- Labor market stability (ie., low unemployment rate)
Essentially, they are tasked with managing the economy to ensure an ideal 2% long run inflation rate and an unemployment rate between 4-5%.
We like to conceptualize it this way: If the domestic economy is a car, the Fed is behind the wheel. The Fed wants to make sure that the economy's not growing too slowly, and when it is, they'll hit the gas (by buying bonds or lowering interest).
However they also want to ensure that the car isn’t going too fast (too many dollars in a system chasing a limited supply of goods). When this happens, as it currently has, they'll hit the brakes and slow the economy back down before things get out of control and the economy hits a Jersey barrier.
This is where the federal funds rate comes in. The Fed has historically made adjustments to the federal funds rate in fairly small increments, but given the persistent inflation, they’ve been far more aggressive. Consensus estimates for 2022 indicate another 75 basis points hike in November and potentially in December as well. (A basis point is a standard of measure used to denote chances in interest rates, equal to one hundredth of 1 percentage point.)
How will this impact your business’s ability to find the capital you need when you need it? Before we answer that, let’s take a slight detour for a quick discussion of the broader market for more context.
What’s Happening In the Market Right Now?
We’re currently seeing a cyclical downturn, likely the worst since the 2008-2009 financial crisis. Normally in periods of tight liquidity, cracks in the credit markets begin forming. For most, if not all businesses, this means access to cash may be at risk as many lending institutions will seek to trim exposure to riskier clients (or clients they perceive to be riskier).
This means that as funding continues to dry up, many businesses that had no problem securing cash previously will find that those sources have dried up. Do you have enough flexibility in your working capital stack for the peak, and subsequently for the coming market trough? If not—or if you’re unsure—read on to learn how Flexport Capital can help.
How Flexport Capital Helps Businesses Manage a Cash Crunch
Flexport Capital is our Trade Finance solution designed to unlock the potential of growing companies—in fact it was launched to combat this specific working capital gap. With a wider credit box, the goal is to approve more clients to act as a lever for economic growth. There are three primary areas where Flexport Capital accomplishes this goal: by accelerating expansion of client companies, minimizing supply chain disruptions for clients, and reducing their landed costs.
Flexport Capital clients have been able to accelerate their inventory purchases in order to keep goods in stock, including in situations where they’re seeing accelerated customer demand.
Others have launched into large networks of B2B retailers and marketplaces—enabling them to grow faster and build a better relationship with new customers without having to worry about payment or logistics. In times of uncertainty, additional capital is extremely helpful when executing on large supply chain initiatives.
Minimize Supply Chain Disruptions
Businesses can now avoid goods being held up by suppliers waiting to release the bill of lading until payment is made. Flexport Capital can make the payment on your behalf and avoid any disruption. Many businesses have used the additional capital provided to build an inventory buffer to avoid stockouts and eliminate the potential for bad customer experience due to lack of supply.
Reduce Landed Costs
The inventory buffer that Flexport Capital clients build can help them spread freight shipments between air and ocean, significantly reducing landed costs. Additionally, cash acquired can be used to finance the purchase and shipping of more goods during non-peak rate seasons, helping level out some of the peaks and troughs of ongoing economic uncertainty.
See How Flexport Capital Can Help Your Business
Ultimately, if businesses and individuals are looking for money in the coming months, there won’t be much available—and what will be available will be even more expensive. Flexport Capital is open for business and able to tailor custom liquidity solutions for our clients.
About the Author
In an effort to curb rising inflation, the Fed raised interest rates which has led to reduced lending across sectors.
It's not yet "panic time," however the macro backdrop is changing rapidly, so staying knowing your options can have an impact on whether you can get the funding you need.
Flexport Capital offers flexible logistics and inventory financing, and our team truly understands the ups and downs of your business cycles.
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