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The Fed Rate Increase: More Financial Pressure for Subcontractors?

After much anticipation and months of speculation, the Federal Reserve has raised the benchmark lending rate for the first time in nearly a decade.

Wednesday the Federal Reserve increased the federal funds rate by 0.25 percent from near zero, where it has been since December 2008. The move is a vote of confidence that the economy has entered a sustainable period of recovery. The unanimous decision, supported by all 10 members of the Federal Open Market Committee, marks the most significant change the Federal Reserve has made since Janet Yellen became chairwoman in early 2014. Following the announcement, Yellen said the increase “recognizes the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardships that have been endured by millions of ordinary Americans.”

The federal funds rate, which determines the rate financial institutions charge each other when borrowing money, affects interest rates for everything from savings accounts to small-business loans. Indicating this will be the first of many rate increases, the U.S. central bank’s policy-setting committee intends to reach a rate of 1.375 percent by the end of next year. While the Fed’s announcement highlighted the gradual approach of small rate increases over the next 12 months, numerous banks increased their prime rate immediately following the announcement. Increasing the cost of borrowing could bring added stress for small business owners already struggling to access financing in the current environment, some say.

The benchmark rate is only one part of the interest rates offered to small and medium-sized enterprises, which have continued to struggle with financing even as the economy has bounced back. Despite the federal funds rate hovering near zero for the past several years, in the wake of the financial crisis, many SMEs have faced high rates and growing unwillingness to lend from traditional banks. For the construction industry, financing issues are compounded by long payment waiting periods under traditional financial practices, which necessitate smart working capital management.

While the Fed is confident the economy is on the right track, rising rates could make access to funding even more expensive for small business owners. Looking to the year ahead, working capital management will be a key concern for construction businesses.

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