Page 20 - BusinessWest October 17, 2022
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Uncertain Times
Rising Interest Rates Dampen Economic Activity, but That’s the Point
By Joseph Bednar
Another month, another rate increase from the Fed. The moves aren’t unex- pected, and are needed to slow infla- tion, but they are concerning, especially to borrowers.
“We haven’t seen inflation like this since the ’80s. To anyone who remembers the late ’70s
and early ’80s, when inflation was running really high, the dangers that represents are self-evi- dent,” said Kevin Day, president and CEO of Flor- ence Bank.
“The Fed responds immediately to a heated economy, and when the economy is overheated, that’s when they raise rates” in an effort to slow inflation, he told BusinessWest. “This time is a little different; inflation already showed up, and now they’re having to calm it down. So it’s a dif- ferent environment than we’ve seen in the last 40 years, and that has created a great deal of uncer- tainty. And no one likes uncertainty.
“But they’ve been pretty consistent in that they’re going to raise rates to bring inflation under control, and they’re going to continue to raise them more until they get it under control,” Day added. “How far do they have to go? No one knows that, of course, and that’s what breeds the uncertainty.”
The Federal Reserve’s mission is to keep the U.S. economy humming, but not too hot or too
cold. So when the economy booms and distor- tions like inflation and asset bubbles get out of hand, threatening economic stability, the Fed can step in and raise interest rates, cooling down the economy and keeping growth on
Still, banks also worry about recessionary environment when rates spike, an environment that opens the door to financial struggles, bank- ruptcies for individuals, and business failures,
 track. “
On Sept. 21, the federal funds rate It’s a different environment
was raised by 75 basis points, to a range of 3% to 3.25%. The move fol- lowed 75-basis-point hikes in June and July, and two smaller rate hikes
in March and May. The Federal Open Market Committee will meet twice more in 2022 to decide if further hikes are necessary in the fight against high inflation.
Still, “not everyone thinks higher
mortgage rates are a terrible thing,”
Forbes notes. “Some real-estate professionals see higher rates as one way to cool an overheated housing market. Others think it’s time to get back to normalcy after two years of artificially low bor- rowing costs.”
In addition, rising rates are not a bad thing for banks in general. When interest interest rates are higher, banks make more money due to the difference between the interest banks pay to customers and the interest the bank can earn by investing.
KEVIN DAY
than we’ve seen in the last 40 years, and that has created a great deal of uncertainty. And no one likes uncertainty.”
     Day said. “Rates rising a bit is usually good for banks, but when it starts going too fast, it creates other problems no one likes to see.”
Historical Perspective
While inflation is at 40-year highs, interest rates are nowhere near the 6.5% seen in 2000, not to mention
the record high of
nearly 20% in 1980.
Continued on page 26
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