Fed interest rate hike worries Sonoma County entrepreneurs, small-business owners

The Federal Reserve’s recent decision to hike interest rates yet again to curb inflation was expected by Wall Street. But its consequences are stinging merchants and entrepreneurs on Main Street, including those doing business here in Sonoma County.

The Fed raised interest rates by 0.75 percentage points, the third time it has raised rates by 75 basis points in a bid to tamp down soaring inflation.

Wary officials are signaling that if rising prices — surging at some of the highest annual rates in 40 years — don’t slow down, future hikes are on the horizon.

Fed Chairman Jerome Powell said the Fed is “strongly resolved” to bring inflation down to 2% and that they will “keep at it until the job is done.”

That’s foreboding news for North Bay small businesses. While some haven’t yet felt the strain of rising costs, the higher interest rate leading people to spend less makes it harder for business owners to plan for the future.

Justine Malone of Cast Away Yarn Shop opened her Santa Rosa store during the 2008 recession, and while she feels confident she’ll be OK, that doesn’t mean navigating this recession will be easy.

“You have to constantly shift your inventory to meet the sales,” she said. “Prices are going up. A lot of my vendors have raised their prices because shipping and production costs are rising, and they have to pass that on to us, and we have to pass that on to the customer.”

Greg Darcy, owner of Darcy’s Fine Jewelers in downtown Santa Rosa, has been able to weather the inflationary storm of the financial crunch, but he’s more worried about the unknown and things beyond his control.

“When they talk about raising the interest rates and trying to make this country go into a recession, but only for a couple of months, I’m blessed I haven’t felt the pinch,” he said. “The things that have held the jewelry industry as a whole together is we can consistently count on someone being in love.”

Keith Sultemeier, CEO of Kinecta Federal Credit Union, said people who have what he calls “variable debt,” such as credit card debt, are going to be impacted the most.

“What the Fed is trying to do is combat higher prices and inflation, and what they’re using is one of their few tools, which is the ability to adjust short-term rates,” he said.

“Most of the time in the past when the Fed starts raising interest rates, it almost always results in a recession.”

Small businesses are being hit especially hard during this rate hike. Sultemeier said small businesses typically have the least access to credit, and when the economy turns down, they’re the ones who need it the most.

“It’s painful, but it’s not potentially fatal,” he said. “If I’m a small business, I really want to think twice before financing things on our business credit card or make sure that they understand what the rates on those credit cards are and what they can do if those rates increase.”

Robert Eyler, professor of economics at Sonoma State University, said the prime rate, which is the rate at which banks tend to lend to their best customers, is the basis of a lot of small business and is directly tied to Federal Reserve decisions.

“It’s a little bit baffling to me as an economist how the Federal Reserve has increased interest rates at such a speed,” he said. “Just like inflation hurts lower-income consumers more than it does higher incomes, higher interest rates tend to hurt smaller businesses more than it hurts larger ones.”

Eyler said small businesses should talk to their lenders, if they intend to use credit, about trying to find ways to either spread the cost of the higher interest rate or look to get loans from alternative sources, such as the Small Business Association.

He also said that entrepreneurs and small-business owners could face a challenging 2023.

“We don’t know how many businesses were already on the edge as a result of the COVID pandemic and have been able to hang on for two years,” Eyler said. “And now, they’re back at the edge, where they would’ve been anyway, and all (the pandemic) did was delay the inevitable for 24 to 30 months.”

Sara Edwards is the business reporter for The Press Democrat. You can reach her at 707-521-5487 or sara.edwards@pressdemocrat.com. Follow her on Twitter @sedwards380.