(KNSI) – The Federal Reserve hiked interest rates by 0.75% earlier this week and financial institutions are reacting. Falcon National Bank Chief Executive Officer John Herges says tightening conditions will affect borrowers, businesses, and even lenders.
“One of the concerns from the bank’s standpoint is that on the deposit side, our deposit rates tend to move up quicker than what we can move our loan rates. And, so as a result of that we have what we call margin compression.”
Banks typically borrow for a shorter length of time than what they lend money out for. They make the money on the difference. When the Federal Reserve begins to tighten and recession risks increase, the yield curve flattens or even inverts. Long-term borrowing rates become equal to, or even less than the costs banks face. Herges says savers are earning 2.5 percent on a Certificate of Deposit today.
Herges says small businesses will be hardest hit by changes in the prime lending rate. It now stands at 4.75 percent.
“There are a lot of small businesses that have to borrow short-term at certain times of the month. Those interest rates are primarily tied to prime. Prime has gone up, and gone up pretty significantly.”
Builders can do a lot more in the spring, summer, and fall months than in winter. Lake towns are bustling at certain times of the year and quiet at others. Toy stores see sales surge around Christmas time. Many businesses use short-term borrowing to smooth out the cyclical nature of their sales.
Herges appeared on KNSI’s Ox in the Afternoon program on Thursday.
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