The fluctuating interest rate has always been a hot topic for business owners, contractors and those interested in the trickle-down effects of our economy. This is especially true during election years.
We’ve experienced massive economic fluctuation over the last few years, and this year is no different. Interest rates have remained higher over the last two years in an attempt to fight inflation.
In mid-September, the Federal Reserve announced a half-point cut, and – at the time of writing this – rates hover around 6 to 7 percent. So, borrowing is still relatively expensive. Economists expect several more quarter-point cuts between now and the New Year.
Interest rates affect the economy directly. Business owners and consumers both feel the impact when the Federal Reserve moves the interest rate up or down. Interest rates reflect the amount of interest due per borrowing period. The amount of interest owed, regardless of rate, is dependent on the amount borrowed or lent, the length of borrowing time (term of the loan) and the initial principal sum.
The more borrowed, the more interest paid. Think of a car and gas pedal. When the interest rates are low, the pedal is down and the economy is stimulated. When the interest rates are high, the foot eases off the pedal and the economy slows.
However, the interest rate is in a constant state of flux depending on multiple factors. Many factors affect the interest rate, which is set by the Federal Reserve.
Another big factor is the demand and supply of money. On a national scale, rates rise when demand far exceeds supply and the adverse. Inflation affects lenders, who are prompted to demand higher rates when prices rise. Policy and central banks have massive influence on rates by managing the money supply. Individually, the credit risk of the borrower can affect the rate they obtain.
Interest rates affect the economy and consumers directly in various ways. Economically, the interest rate influences the Federal Reserve Goals – maximum employment and stabilizing market prices. Additionally, interest rates have a direct impact on the housing crisis.
With low demand and declining home prices, homeowners are choosing to stay in their existing properties, and potential homeowners are awaiting interest rate drops or relief. Residential service and remodel businesses should see an uptick in business as property owners prefer to remodel or make improvements (like boiler retrofits) than to move. Lastly, consumers and businesses have lost confidence in the bond market since the Federal Reserve announced pulling back.
Spending and borrowing will increase or decrease depending on the interest rate. Big purchases like homes, automobiles, remodels and retrofits often require borrowing. With high rates, consumers don’t feel incentivized to make these purchases.
Investments and expansions seem less feasible and desirable with high interest rates. Personal and business savings feel the influence of interest rates as well. The amount earned on savings directly correlates with current rates.
History can inform economists and decision makers on past decisions and rate changes. During the pandemic, interest rates hit a record low of 2.65. As the pandemic eased, interest rates rose to 5% in April 2022, the highest rate since January 2021. By September 2023, rates were up to 6.9%, notably higher but not touching the high rates of 7.88% in the 1990’s. The highest interests on record were in 1981 at 18.63%.
While consumers may feel the rates are at unprecedented highs, it’s important to reflect that the rates are still ⅓ of the highest rates recorded – an important perspective.
Many people have linked the fluctuating interest rates to presidential election years. The Federal Reserve has indeed changed interest rates in all but two presidential elections dating back to 1972. Interestingly, the party in the White House has lost 5 of 6 elections when interest rates fell. Federal Reserve Chair Jerome Powell denies a connection between lower interest rates and presidential election years. He claims the Federal Reserve bases rates purely on data. That data could coincide on previous presidential election years as those years impact consumer spend and economics.
The interest rate adjustments are typically contingent on choices made one to two years before the election year, further validating Powell’s claim.
Interest rates are expected to continue to ease throughout the remainder of 2024 and into 2025. However, it is not anticipated that interest rates will reach the historic lows experienced during the pandemic. Economists forecast a mortgage rate of 6.2-6.5% by the end of 2024 and into 2025, and some have gone as far as saying we’ll never see pandemic-era rates ever again.
How will this affect consumers and businesses? The construction industry is a notoriously cash-intensive industry. Loans and borrowing are commonly needed for large projects. Interest rates can directly influence the pace and volume of construction activity.
If costs are affected, then project pricing will increase as well. This will directly affect the consumer and the business by impacting profit margins. Interest rates on financing will influence consumers needing to borrow for projects and could deter or encourage them to proceed. If interest rates are high, the amount of work being bid or requested will decrease. Layoffs could follow. Less work implies less workers needed.
Finally, if a business isn’t already a competitor in the commercial market, interest rates could affect their ability to break into that industry.
View the economy as an intricate web. Interest rates are near the heart of the web and influence various branches. Impacts to consumers and business can be felt through decisions made by the Federal Reserve, banks and even their own spending habits. Immediately, breathe a sigh of relief that interest rates are likely to continue falling.
By Allie Perez
# # #
A graduate of New York University, Allie received her BFA in Drama and BA in English. She went right into marketing. Through marketing she discovered the skilled construction trades industry. She’s managed plumbing and HVAC companies for over ten years. She founded Texas Women in Trades and Texas Women Work to bring more women, people of color and young people to the skilled trades and manufacturing industries. TexWIT and TWW serve as stakeholders for federal agencies such as the DOL Women’s Bureau and OFCCP. She serves on the COSA Small Business Advisory Board as the Mayoral Appointee and the Ready to Work advisory board. Allie was awarded the PHCP Top Women in Construction Award in 2021, the PHCP Millennials on the Move Award 2023 and the PHCC Excellence in Operations award 2023. Recently awarded San Antonio Business Journal 40 under 40 2024. Currently, Allie lives in San Antonio with her husband, daughter, dogs, hamster, bunny and lizard.