How Will Interest Rates Impact 2024 Business Planning?
Interest rates and inflation have been central topics of discussion throughout 2023. After years of historically low-interest rates, the sudden adjustment to rising rates, combined with uncertainty regarding the economic impacts of those increases, has made it a challenging year for some businesses to navigate.
It’s too soon to predict exactly how interest rates will play out in 2024, so businesses planning for the coming year should consider the possible impacts of various scenarios and prepare a strategy accordingly.
SCENARIO 1: CONTINUED RISING INTEREST RATES
The Federal Reserve raised rates faster in 2023 than in the past 40 years. Will that trend continue into 2024? It all depends on inflation. The Fed’s goal in raising interest rates 11 times since 2022 has been to combat sticky inflation. If inflation persists, rates will likely continue to rise. This could present a double whammy to business owners in the form of increased cost of goods and higher interest rates. Businesses with loans should evaluate their terms and options for refinancing as they plan for 2024 to ensure they are prepared for potential increases. Interest rates have increased significantly, so if a loan from several years ago is coming due to refinancing, factor in higher payments than the business has budgeted for in the past.
Businesses should also consider how rising interest rates may impact their customers and workforce. If the business relies on consumers spending extra money, a rising rate environment may call for reduced revenue forecasts. Higher mortgage rates may make recruiting or relocating employees looking to buy or sell a home more challenging. If employee recruitment or relocation is a critical aspect of the business plan, business owners may want to consider providing an incentive to subsidize increased mortgage costs.
Rising rates are not bad for all businesses. Businesses that can increase revenues to offset higher interest costs by increasing prices or expanding their customer base may see minimal impacts on their bottom line. A rising rate environment can also offer opportunities to maximize yields on balance sheet liquidity, so businesses in this position should ensure their deposit strategy takes advantage of available opportunities.
SCENARIO 2: RATES HOLD STEADY
If interest rates remain steady into 2024, business planning will be similar to a rising rate environment. Businesses should prepare now by reviewing loan terms and determining the next steps. If loan terms include ballooning payments in 2024, for example, the business should be prepared for potentially much higher expenses or consider refinancing. If refinancing is a better option, business owners will need to determine how long to lock in current rates. There are unique considerations for every business and situation, so it is worth the time to consult with a business banker early in the planning process.
SCENARIO 3: DECREASING INTEREST RATES
There are two potential economic scenarios in which interest rates could begin to decline in 2024: a soft landing or a recession.
In the ideal scenario, the recent rate hikes will achieve the so-called “soft landing” goal — reducing inflation with minimal impacts on the economy. If this occurs, the cost of borrowing will eventually come down as the Federal Reserve slowly reduces rates. Businesses may want to invest excess liquidity back into their business as deposit rates decrease or take advantage of lower interest rates to finance their growth.
If interest rates begin to decline due to a recession, businesses may need to rely on existing liquidity to make it through downtimes. Preparing for this scenario should include ensuring the business has an adequate line of credit in place now to cover short-term working capital needs later.
After the Fed’s most recent meeting in July, Chair Jerome Powell said staff economists were no longer forecasting a recession, however, there remained uncertainty whether more rate increases would be needed to stymy inflation. The Fed meets again this month and will determine if another rate increase is needed. The meeting should also shed more light on what to expect in the coming year.
The past decade has provided an unusual stretch of steady, low-interest rates, which may make it challenging for some businesses to adjust their planning to include the uncertainty of fluctuating rates. A skilled business banker can help strategize and find solutions to navigate times of change, keeping the business on track to achieve its long-term goals.