Home buyers, entrepreneurs and public officials are confronting a new reality: If they want to hold off on big purchases or investments until borrowing is less expensive, it’s probably going to be a long wait.
Governments are paying more to borrow money for new schools and parks. Developers are struggling to find loans to buy lots and build homes. Companies, forced to refinance debts at sharply higher interest rates, are more likely to lay off employees — especially if they were already operating with little or no profits.
Over the past few weeks, investors have realized that even with the Federal Reserve nearing an end to its increases in short-term interest rates, market-based measures of long-term borrowing costs have continued rising. In short, the economy may no longer be able to avoid a sharper slowdown.
“It’s a trickle-down effect for everyone,” said Mary Kay Bates, the chief executive of Bank Midwest in Spirit Lake, Iowa.
Small banks like Ms. Bates’s are at the epicenter of America’s credit crunch for small businesses. During the pandemic, with the Fed’s benchmark interest rate near zero and consumers piling up savings in bank accounts, she could make loans at 3 to 4 percent. She also put money into safe securities, like government bonds.
But when the Fed’s rate started rocketing up, the value of Bank Midwest’s securities portfolio fell — meaning that if Ms. Bates sold the bonds to fund more loans, she would have to take a steep loss. Deposits were also waning, as consumers spent down their savings and moved money into higher-yielding assets.
As a result, Ms. Bates is making loans by borrowing money from the Fed and other banks, which is more expensive. She is also paying customers higher rates on deposits.
For all those reasons, Ms. Bates is charging borrowers higher rates and being careful about who she lends to.
“We’re not looking at rates coming down any time soon,” she said. “I really see us taking a close watch and an internal focus, not so much on innovating and getting into new markets but taking care of the bank we have.”
On the other side of that equation are people like Liz Field, who started a bakery, the Cheesecakery, out of her home in Cincinnati, focusing on miniature cheesecakes, of which she has developed 200 flavors. She gradually built her business up through catering and mobile food trucks until 2019, when she borrowed $30,000 to open a cafe.
In 2021, Ms. Field was ready for the next step: buying a property including a building to use as a commissary kitchen. She got a loan for $434,000, backed by the Small Business Administration, with an interest rate of 5.5 percent and a monthly payment of $2,400.
But in the second half of 2022, the payments started increasing. Ms. Field realized that her interest was pegged to the “prime rate,” which moves up and down with the rate the Fed controls. Because of that, her monthly payments have climbed to $4,120. Along with slowing cheesecake orders, she has been forced to cut her 25 employees’ hours, and sell one food truck and a freezer van.
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“That really hurts, because I could have one to two shops for that price,” Ms. Field said about her payments. “I’m not going to be able to open more stores until I get this big loan under control.”