Higher Percent Solutions: Preparing for a rising interest rate environment.

• Author: Barbour, Tracy
• Position: FINANCE

Interest rates rose in May for the second time this year. The Federal Reserve (Fed) bumped its benchmark federal funds rate 0.5 percent to a target range of 0.75 to 1 percent. The nation's central bank applied a quarter-point-rate increase in March and has indicated that it intends to raise rates after each of its five remaining policy meetings in 2022. The Fed also announced plans to reduce its nearly $9 trillion asset portfolio of Treasury and mortgage securities, and it is allowing bonds to mature without reinvesting the proceeds into new securities. The recent moves are designed to curb record-high inflation, which surged to 8.5 percent in March--its highest level since December of 1981.

Escalating interest rates is one of today's most important economic issues, according to Mark Edwards, chief credit officer and bank economist at Northrim Bank. "The Alaska economy showed broad improvements in 2021 and the first quarter of 2022 as it rebounded from the pandemic lows of 2020," he posted on April 29 in Northrim's Alaskanomics blog. "A steady recovery of jobs in nearly every sector resulted from improved tourism, rising oil prices, a strong housing market, and consumer liquidity from government stimulus programs. We believe that the potential effects of rising interest rates, high inflation, and supply chain disruptions are the most pressing issues facing the economy in 2022."

Businesses have been expecting the effects of a higher-rate environment. As of April 19, 2022, the Federal Open Market Committee (FOMC)-the Fed's policy-making arm--was projecting Fed funds target rates to increase 2.75 percent in the next twelve to eighteen months, according to Wells Fargo Securities.

"Long-term, fixed rates have increased more than short-term rates in anticipation of projected Fed funds rate increases," says Sam Mazzeo, who leads Wells Fargo's Alaska Commercial Banking Group. "Ten-year, US Treasury Bill yields have already increased 1.4 percent from 1.5 percent at year-end [December 31, 2021]. Ten-year US Treasury Bill yields are currently 2.9 percent, as of April 19, 2022. Banks often tie fixed rates directly to US Treasury Bill yields, which are also a great barometer of interest rate swap costs."

Effects on Obtaining Loans

Banking customers will feel the immediate pinch of the higher interest rates with lines of credit, which are attached to the prime rate, says Chad Steadman, a senior vice president and senior corporate lending director at First National Bank Alaska. However, in the last couple of years, many businesses have accumulated enough cash that they don't need to access their lines of credit...