Interest rates, which hit a 22-year high last month, are a great unknown for finance professionals right now. What happens from here is anyone’s guess—and the answer you get will depend on who’s guessing.
Previously, Fed Chair Jerome Powell suggested rate hikes could finally pause this September, while acknowledging that the Fed needs to assess data before making any kind of decision. In recent weeks, different Fed officials have also weighed in, sometimes with considerably different takes.
There was Fed Governor Michelle Bowman, who said more hikes might still be needed to rein in inflation. In the other corner, there was Philadelphia Fed President Patrick Harker, who thought the Fed might be at the end of its hiking cycle, while New York Fed President John Williams said it’s an “open question,” adding that we’re likely “pretty close to what a peak rate would be.”
In other words, it’s a bit of a shrug. Who knows? But we do know the intense ripple effect that rising interest rates have already had, with borrowing costs skyrocketing for consumers and banks charging higher rates to borrowers.
“Overall, interest rates reflect the aggregate sense of risk in the macroeconomic environment,” Michael Bayer, CFO of cloud storage provider Wasabi Technologies, told CFO Brew. “There’s a lot of uncertainty out there.”
What does all this mean for orgs? It’s a bit of a mixed bag, according to Amy Spurling, founder and CEO of employee perk management platform Compt. “What we’re finding is that different pockets are being more severely impacted than others,” Spurling told CFO Brew, and those discrepancies will determine which strategy works best for your organization.
But, as the gulf between Fed officials’ comments attests, the current high interest rates likely won’t last forever, and finance departments need to plan accordingly.
Know where you fall. Your first task is concretely determining where your organization stands, which isn’t as straightforward as it may seem, Spurling said. “There’s not a blanket approach,” she explained. “It’s very, very micro into specific industries, even pockets within industries.”
To determine your org’s standing, think through some of the key metrics. For Spurling’s company, for instance, high interest rates are “positive because we’re getting a really high yield on our money,” she said. “Our interest income is fantastic right now.”
The situation is different for anyone with bank debt, however. “That’s where companies are going to be having to deal with those covenants, and be paying out,” Spurling explained. “You get no extra for your business. It’s just a higher cost,” she said, likening the situation to what happens when homeowners see interest rates go up on their mortgage. “You don’t have a better place; you just have to pay more money for it.”
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If that’s where you fall, it’ll be important to think critically about existing loans. In some cases, refinancing could make sense, and analyzing debt repayment plans will be crucial for any debt-strapped business.
Back to the basics. While parsing out your company’s precise standing in this high interest rate environment will lead you to highly individualized solutions, there’s also a tried-and-true rulebook that any finance professional should consider, Bayer noted. Finance professionals need to think critically about what initiatives they take on, and the investments they’re prioritizing.
“The higher the interest rates, the higher the returns on those investments need to be, and the more quickly they need to be getting profit from them,” he explained. “The cost of capital is the rental rate. No one gives you capital; you rent it. The first thing I think about is the economic value add.”
For Bayer, it’s about going back to the basics: Think about the payback on every program you have, and consider the cost of every effort, he said. It’s not just about analyzing profitability.
“Peel apart your business. Attach capital to each one of the efforts that you have underway, and figure out, ‘Is it returning a positive return on capital?’” he explained.
That could lead many companies to seriously reconsider how they’re currently doing things—and that’s the point.
“Every CFO should be thinking about their business not just in terms of: ‘How do I grow it the fastest?’ but ‘How do I deploy capital most effectively and most efficiently?’” Bayer said. While this might also lead to a pivot away from “capital-intensive projects that have long return cycles,” that’s what many companies will have to do to ride out the current moment, he explained.
“That’s exactly what the policy is trying to do, what the Fed is doing by raising interest rates, what the markets are doing,” he continued. “It’s trying to stop investments that are not deploying capital efficiently.”
“Now is a time to focus on responsible growth,” Bayer stressed. “What that means is always thinking about: ‘We are in a business cycle. This too shall pass, but while we’re in this business cycle, you need to invest responsibly.’”