In a move that ends an unprecedented period of easy monetary policy, the Federal Reserve announced in a unanimous decision on Wednesday that it would raise its target for short-term interest rates by a quarter of a percentage point. The announcement is one for the history books, as interest rates hovered near zero percent for the past seven years.
The federal funds rate represents what banks charge each other for overnight loans. It serves as a benchmark for banks’ and other lenders’ higher-rate loans for everything from mortgages and credit cards to small business loans and corporate bonds.
The new policy represents a calculated risk that the American economy, which is still in a state of rebound from the devastating housing crash that shook the global financial system in 2008, is healthy enough to start withdrawing the extraordinary financial support provided by the Fed in the years following the meltdown.
While Fed Chair Janet Yellen believes that the time is ready to begin normalizing monetary policy, the decision has been met with contention. Many investors and Wall Street forecasters have urged bankers to tighten policy, warning that extending the period of near-zero interest rates could unleash inflation. Other economists, pointing that the low unemployment rate understates the amount of slack in the economy, fear that hiking rates could halt the recovery in its tracks.
According to Steve Beagleman, president and CEO of SMB Franchise Advisors, could have an effect on the franchising world. The increase in interest rates can increase the cost of borrowing for franchisees, putting pressure on cash flows as they service a bigger loan repayment.
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