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 indications of that More increases 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 bulk of fake news We are now given that inflation is running at 7%-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 these economic changes affect an increasing number of families and businesses, more and more entities They will face financial hardships. 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.

Obviously, the stock market is also under pressure as well, with S&P 500 officially slips into a bear market On June 13, just before the Fed’s latest rate hike, the Dao is close to joining him The day after the announcement of the interest rate hike.

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 improve distressed assets. When companies begin to accumulate significant discrepancies between their groups against their debt, it is time to consult with Specialized in reducing non-performing assets early to avoid having to fill out Chapter 11 down the road. 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 impending recession before it arrives. Early preparation and fluidity appear to be compelling moves at this juncture.

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

Founder and President, Distressed Capital Resources LLP

William N. Lobel is founder and president Troubled Capital Resources LLCa company that has combined almost all available resources to assist borrowers in a financially distressed real estate or business, with the aim of maximizing the borrower’s leverage and options for successfully resolving the borrower’s financial problems.