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The Painful Impact of High Interest Rates on Bakers, Farmers and Consumers

Home buyers, entrepreneurs, and public officials are facing a new reality: If they want to delay major purchases or investments until borrowing becomes more affordable, they may be in for a long wait.
Despite the Federal Reserve nearing an end to its increases in short-term interest rates, market-based measures of long-term borrowing costs have continued to rise in recent weeks. This has led to concerns that the economy may be headed for a sharper slowdown.
Ms. Mary Kay Bates, the chief executive of Bank Midwest in Spirit Lake, Iowa, explained that small banks like hers are at the center of America’s credit crunch for small businesses. During the pandemic, she was able to make loans at 3 to 4 percent due to the near-zero Fed benchmark interest rate and the high level of consumer savings in bank accounts. However, when the Fed’s rate started rising, the value of Bank Midwest’s securities portfolio fell, making it more expensive for Ms. Bates to make loans and prompting her to pay customers higher rates on deposits.
Meanwhile, small business owner Liz Field, who runs a bakery called the Cheesecakery, felt the impact of rising interest rates when her loan payments started increasing, causing her to cut employees’ hours and sell business assets.
Analysts predict that interest payments for small businesses will increase to about 7 percent of revenues next year, up from 5.8 percent in 2021. This has led to a shift in strategy for business leaders and consumers, who are now realizing the need to make more careful financial decisions.
Additionally, the high cost and scarcity of capital are impacting new and existing businesses, as well as industries such as agriculture and residential construction. For example, the Schwagerl family, who run a farm in Minnesota, are facing tough decisions due to high interest rates on their line of credit.
Meanwhile, residential construction activity has declined, with builders offering discounts to compensate for high mortgage rates, potentially impacting the availability of rental properties in the future.
Interest rate increases have also affected the automotive industry, with the average interest rate on new four-year auto loans climbing to 8.3 percent. Car dealers are experiencing a shift in customer behavior, with more customers making larger down payments to minimize financing costs. However, those who have to borrow for day-to-day needs while dealing with rising housing costs and subdued pay growth are at a disadvantage.
The impact of higher interest rates is felt asymmetrically, with wealthier individuals in a better position to navigate the challenges compared to low-income individuals who face additional financial hurdles.
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