Wondering about inflation and interest rates moving forward in 2022? Discover the potential impacts of shifting Fed policy on your small business.

Unless you took out a variable interest rate loan, don’t sweat the Fed. Instead, fix what’s causing your costs to rise.

What should worry small business leaders more—inflation or interest rate increases? What should business leaders do about the Fed’s pending moves?

These questions come to mind on news that starting in January, the Fed will start to taper — halving the monthly bond-buying program it unleashed when the pandemic began in early 2020.

What’s more the Fed plans up to three interest rate increases in 2022 and two more in 2023 and 2024, according to CNBC. Meanwhile consumer inflation rose 6.8 percent in November—a level not seen in 39 years, according to the Wall Street Journal.

For business leaders, inflation and interest rates are both affecting their ability to survive the pandemic. That’s because more than 70 percent of small business owners said that rising costs for goods and services “significantly impacted their operations within the past 12 months,” according to the latest Small Business Index report which surveyed 50 small- business operators between Oct. 13 and Oct. 27.

Businesses are taking many steps to counter those effects. As Fortune reported, these include raising prices (63 percent of survey respondents), cutting staff (40 percent), and taking out a loan (45 percent).

This leads to my thoughts about the two questions at the top of this article.

What should worry small business leaders more—inflation or interest rate increases?

While the answer to this question varies by company, the survey results suggest to me that inflation is a bigger concern to companies because it is forcing them to make short-term decisions with negative long-term ramifications.

How so? Raising prices may allow a company to remain profitable as its costs rise. However, it can cause customers to stop buying their products altogether or consume fewer than they would have otherwise. Raising prices also raises the risk that some competitors with leaner cost structures will hold their prices—causing consumers to flock to the lower-priced rivals.

Cutting staff is also a short-term tactic that hurts companies in the long-term. If a company is poised to run out of cash, cutting people may be a necessary means of keeping the company afloat. However, such cuts demoralize and overwork the staff that remain and may boost the odds that they burnout. What’s more, should a business experience a spike in demand for its products, it will struggle to hire new people in the current tight labor market.

The Fed’s tapering and interest rate increases are likely to be a less immediate challenge to small businesses as long as they locked in the interest rates for their loans. If they decided to borrow at a variable rate, those Fed rate increases will boost the borrowers’ interest payments when their loan rate resets.

In theory, the Fed’s interest rate increases should tame inflation. But in practice, they might just slow down economic growth. That’s because this year’s inflation is caused by a supply chain that can’t deliver enough of the goods and services people want to buy.

The lack of supply is due to many factors—most notably the inability to hire enough workers to manufacture goods, deliver services, load and unload ships and drive goods from ports to warehouses, retail stores and consumers.

Raising interest rates is at best a blunt instrument for solving these supply chain problems.

Which leads me to conclude that unless they have taken out significant variable rate loans, companies should be more worried about inflation.

What should business leaders do about the Fed’s pending moves?

If a company has borrowed money at a rate that goes up if the Fed raises rates, its leaders should either renegotiate the contract to lock in today’s interest rates or pay off the loan before the rates reset.

Otherwise, business leaders should not worry about the Fed and instead focus on fixing their supply chain problems. This is a very difficult—but more urgent problem. As I wrote in November, here are the key steps to take:

  1. Measure the broken supply chain’s damage to your business.
  2. Find the causes of your supply chain’s collapse.
  3. Forecast how long it will take to repair the broken links.
  4. If you can’t wait, rebuild your supply chain.

 

With elections always at the front of peoples’ minds in Washington, I am confident that the Fed will not drive the economy into a recession by aggressive interest rate increases and it will be acutely aware of whether the increases are driving down inflation. If either of these things happen, the Fed will back off.

This article was written by Peter Cohan from Inc. and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.

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