While we do not expect inflationary pressure anytime in soon, it would be unwise to ignore the Fed's comments and the market's reaction. For firms that hold inventory in the form of raw materials or stocked goods, this is a shot across the bow. Business owners should begin preparations for a different rate environment now, and not be surprised by the changes coming. If possible, negotiate contracts in advance and define rates now or try to cap rate increases over a set period of time. This is different than when rates were falling and you could benefit from such rate changes.
All business owners should spend this next year strengthening their market position so they can pass on increased borrowing costs. Can you use the current low interest rate environment to acquire a competitor in a location you are weak? Is there a big project you've been delaying that could pay off in a year or two? Firms that compete on cost, not differentiated products and services will find it difficult to pass on increased borrowing costs initially. For many of those businesses, the resulting margin squeeze will hurt.
We'll have more on this subject over the coming months, but urge our readers to review their upcoming capital needs carefully in light of the changes that will begin in the second half of this year. Remember, the market anticipates the Fed's moves in advance, so while one rate increase may seem insignificant, it's the direction of movement that will affect the credit markets.