Financial advisors understand that our clients need steady guidance during times of economic uncertainty, and the extended period of higher interest rates over the past two years has created deep concern and sometimes panic for those with loans coming due and for those with rates set to adjust from the historically low interest rates of the post-pandemic era. The Federal Reserve's restrictive monetary policy appears to have curbed inflation, which was a particularly enormous concern for investors, but the rate hikes enhanced the risk of ballooning payments for those not locked into a long-term fixed loan. Adjustable-rate mortgages typically get most of the media attention, but small business typically have short term lengths and must refinance any remaining debt and new higher rates.  Particularly in an era where there are growing concerns about slowing consumer spending weakening cash flow, business owners may see substantially higher debt servicing at the same time as shrinking revenue. Similarly, homeowners might fear that rising unemployment will bring job losses with similar effects.

The good news is that the markets are anticipating dropping interest rates, which are already emerging in lower mortgage rates, but these rates still stand considerably higher than most of the loans they would replace. In this blog, we'll explore the challenges faced by small businesses and homeowners whose loans are coming due, the broader economic context, and how financial advisors can help clients navigate both the reality and perception of financial risk. Additionally, we'll provide actionable strategies to help reduce client anxiety and foster a calm, proactive approach to managing their finances.

The Economic Context: Rising Interest Rates and Their Impact

Over the past two years, the Federal Reserve has raised interest rates by approximately 5 percentage points, bringing the federal funds rate to a range of 5.25% to 5.50% as ofmid-2024. This is the highest level since 2001. These increases have been implemented to combat inflation, which peaked at 9.1% in June 2022—the highest in four decades—before gradually declining to around 3.2% by mid-2024.Inflation represents a much larger economic risk than other economic factors because it begets a vicious cycle where the expectation of inflation leads to higher nominal prices and wages.

All indications are that inflation will continue to cool, which is great, but the primary tool to achieve this has generated substantial risk for those needing to set new terms on private or business loans. According to data from the Mortgage Bankers Association (MBA), the average 30-year fixed mortgage rate rose to approximately 7.5%, the highest in more than 20 years, before just recently falling as banks and investors anticipate a coming rate cut. Similarly, small business loans are now being offered at rates ranging from 8% to 10%, compared to just 4% to 6% a few years ago.

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