How the Rising FED Rate Affects Construction
Obviously, a rising fed rate in particular affects the construction industry alongside other industries. Principally, raising the Fed rate helps to slow inflation. As that goal contributes toward less spending and more saving, it can actually reduce some spending about construction.
There is another thing the Fed rate can do is bring up other rates tied directly to it. For instance, the Fed rate directly affects credit card interest rates. It also drives up or down mortgage-backed securities. These conversely drive mortgage rates, and this is the problem. Mortgage rates climb when the Fed rate goes up, and then monthly payments will go up and the amount of house you can afford drops—often significantly. We call this a reduction in a buyer’s “purchasing power”.
Pay attention to how much more house you can afford with lower mortgage interest rates.
Other things that a rising Fed rate affects include labor market—which may make it a little bit easier. When the Fed tries to slow the economy by raising rates, this often causes some additional unemployment. People can find new motivation to find work elsewhere when that happens.
Because mortgage rates go up with the Fed rate, some construction projects can experience significant issues which is related to closing and financing. The underwriting process can create havok if borrowers don’t have a rate locked in advance.
Please take escalation clauses into consideration.
How Does the FED Rate Affect Inflation?
People can make money in a strong economy faster than when they are in a weak economy, because a rising Fed rate slows things down. It’s not that they don’t want you making money, it’s that they don’t want consumer prices to go up so quickly thus they get out of control. After all, nobody wants to pay $200 for a loaf of bread. In June 2022, we saw the highest 12-month inflation increase (9.1%) since the 12-month period ending November 1981.
People find pricing can rise quickly when money can be easily acquired. No matter if you agree with this, the Fed raises uses its control over the prime rate to counteract that tendency. Unfortunately, they tend to lag in their rate hikes and this action usually last too long.
How a Rising FED Rate Affects Hiring
The statistics show that hiring typically gets a boost from a rising Fed rate. If your construction business is in good financial shape, Fed rate increases may help you to hire more people. The potential employees will not have nearly as many options when FED slows the economy and slows hiring. When the strong economy makes working easy, you may need to pay $30 an hour for a new guy with no experience. When rates go up and jobs are fewer in the market, that same worker make take a job at $18 an hour—particularly in a role where he feels valued.
Watch Those Credit Cards
Short-term debt is affected by the Fed rate too much, and credit card rates are tied directly to it via the prime rate. If you are operating your business from your credit card but don’t pay it off every month, your interest payments will follow those rising prime rates.
Please take a look at the ramifications on your business and whether you can afford to pay down some of your debt when rates will most likely go up.
Post time: Jun-21-2023