F I NANC E
Higher Percent Solutions Preparing for a rising interest rate environment
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By Tracy Barbour
nterest rates rose in May for the policy-making arm—was projecting their lines of credit because their cash is second time this year. The Federal Fed funds target rates to increase so strong.” Consequently, the demand for smaller Reserve (Fed) bumped its benchmark 2.75 percent in the next twelve to federal funds rate 0.5 percent to a eighteen months, according to Wells loans has waned; when companies do borrow, it’s for larger purposes, such as target range of 0.75 to 1 percent. The Fargo Securities. “Long-term, fixed rates a real estate purchase. “Most nation’s central bank applied a quarterincreased more of our businesses report that point-rate increase in March and has have business is up,” Steadman indicated that it intends to raise rates than short-term rates in says. “Many of the businesses after each of its five remaining policy anticipation of projected can handle the higher meetings in 2022. The Fed also Fed funds rate increases,” interest rates.” announced plans to reduce its nearly $9 says Sam Mazzeo, who Depending on the trillion asset portfolio of Treasury and leads Wells Fargo’s Alaska financials involved, higher mortgage securities, and it is allowing Commercial Banking Group. interest rates can significantly bonds to mature without reinvesting “Ten-year, US Treasury Bill affect a company’s ability the proceeds into new securities. The yields have already increased SAM MAZZEO, head of Wells to secure loans. A higher recent moves are designed to curb 1.4 percent from 1.5 percent Fargo Alaska’s Commercial interest rate results in record-high inflation, which surged to at year-end [December 31, Banking Group Wells Fargo a higher payment that 8.5 percent in March—its highest level 2021]. Ten-year US Treasury Bill yields are currently 2.9 percent, as borrowers must prove they can afford. since December of 1981. Escalating interest rates is one of of April 19, 2022. Banks often tie fixed “The best way to counteract that is to today’s most important economic rates directly to US Treasury Bill yields, have a solid plan of how you’re going issues, according to Mark Edwards, which are also a great barometer of to repay the loan,” Steadman says. “The bank wants to see good balance chief credit officer and bank economist interest rate swap costs.” sheet strength.” at Northrim Bank. “The Alaska economy Essentially, higher interest rates showed broad improvements in Effects on Obtaining Loans 2021 and the first quarter of 2022 Banking customers will feel the affect profit, cash flow, and the ability as it rebounded from the pandemic immediate pinch of the higher interest to amortize debt. This makes higher lows of 2020,” he posted on April 29 rates with lines of credit, which are leverage less affordable for borrowers. in Northrim’s Alaskanomics attached to the prime rate, “Today, borrowers are more concerned blog. “A steady recovery of says Chad Steadman, a with hedging interest rates related to jobs in nearly every sector senior vice president and future borrowing needs compared to resulted from improved senior corporate lending one or two years ago,” Mazzeo says. Should current conditions change tourism, rising oil prices, director at First National a strong housing market, Bank Alaska. However, in borrowers’ approach to commercial financing? Mazzeo’s and consumer liquidity the last couple recommendation is for from government stimulus of years, many borrowers to maintain a mix programs. We believe that businesses have of fixed- and adjustablethe potential effects of rising MARK EDWARDS, EVP, accumulated rate debt, and they should interest rates, high inflation, Chief Credit Officer & Bank enough cash Economist at Northrim Bank consider the amount of and supply chain disruptions Northrim Bank that they don’t interest rate risk their business are the most pressing issues facing the need to access their lines can afford. For example, a economy in 2022.” of credit. “Many businesses company operating on a Businesses have been expecting the have paid down their debt narrower margin with less effects of a higher-rate environment. and are in a cash position,” TRACY MORRIS, SVP, pre-tax cashflow cannot As of April 19, 2022, the Federal Open he says. “We have had Commercial Banking at KeyBank afford to take much risk and Market Committee (FOMC)—the Fed’s businesses that have closed KeyBank 10 | J u l y 2 0 2 2
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