The "Fed Tease" Goes On
Kevin F. Clune, CLFP
Over the past 7-8 years the Federal Reserve has kept interest rates low in order to promote economic growth through increased borrowing for asset acquisitions. One unintended consequence of this decision was that many business owners who were acquiring small to medium ticket capital equipment opted to use cash for their equipment purchases.
The uncertainty of additional Government actions and regulations also suppressed the appetite for credit among business owners. As a result of these factors, some segments of the equipment finance industry were adversely affected by the lack of demand for their loan and lease services.
However, for any equipment that is vulnerable to obsolescence, an equipment lease may have had advantages over a cash purchase. These include easy upgrades and potential tax benefits. Regardless, it seemed that business owners were willing to forego these benefits rather than taking on more debt.
With the recent banter about the possibility of the Federal Reserve increasing short term borrowing rates, some of these purchasing decisions may be affected. As stated in a CNN article that was written prior to the June 17th meeting of the Fed, "Many Americans don't pay much attention to what Federal Reserve Chair Janet Yellen and "the Fed" do, but that could change very soon."
- Will business owners be less inclined to pay cash for equipment, thereby maintaining cash balances for more productive and profitable purposes?
- Will there be an increase in asset acquisitions and a subsequent demand for credit?
- Will there be more confidence in the economy that will encourage growth and expansion?
As of this writing, we have learned that the Federal Reserve has decided to delay the decision on a rate increase. Most economists predict them to revisit the move at their September meeting. If they feel that the economy is strong enough to sustain an increase, they will probably vote to raise rates at that time.
I’m not holding my breath,
Kevin F. Clune, CLFP
Clune & Company, LC
