‘Quiet enemy of inflation’ still looms for Maine businesses after Fed rate hike

For the first time in three years, the Federal Reserve raised interest rates on Wednesday to tame inflation and signaled that there may be further increases ahead. Monetary policymakers raised the benchmark rate by a quarter of a percentage point to a range of 3.75% to 4%. "The plain fact is that inflation is too high and has been for too long,” Fed Chair Kevin Warsh said at a televised press conference after the decision. U.S. inflation was 3.4% in August, still well above the central bank’s 2% target. Pushing back against President Donald Trump’s fiery demand to lower rates “fast,” Warsh declared that “we at the Fed are unwavering in our vital and straightforward purpose: full employment and price stability, and a thriving American economy that sets the standard for the world.” So, what does the increase in short-term borrowing costs mean for mortgages, construction loans and other long-term borrowing costs? Not much yet, judging by the bond market, where 30-year Treasury yields are little changed this week at around 5.3.% 'Higher borrowing cost' Maine market watchers see the Fed’s rate increase as a double-edged sword for businesses. “The short-term impact will create challenges to Maine’s economy because of the higher borrowing cost, which tends to impact Maine’s many small businesses,” said Brian King, president of Bank of America Maine. “On the positive side, if it curbs inflation as intended, Maine’s businesses and consumers should benefit from lower costs and potentially higher savings rate,” he added. Andrew Silsby, president and CEO of Augusta-based Kennebec Savings Bank, doesn’t expect a short-term material impact on Maine businesses from what he calls a modest rate increase. “In the long run, it’s better to pay a little more for credit now than to allow inflation to continue eroding purchasing power and driving up the overall cost of doing business in Maine,” he said. But Silsby said that while the Fed controls short-term rates, long-term rates are ultimately determined by the bond market. “Even when the Fed buys longer-term bonds in an effort to push those rates lower, investors' views on future inflation, government borrowing and economic growth can outweigh the Fed's actions, which appears to be what happened this week,” he said. He’s particularly concerned about rising prices. “Inflation is the quiet enemy of economic growth because it erodes purchasing power, increases costs, and creates uncertainty for businesses and consumers alike,” he said. Silsby also noted that the best way to lower long-term rates “is not necessarily to buy more bonds; it's to convince the market that inflation is under control.” Oak McCoy, an economics professor at the University of New England’s College of Business, is also concerned. “For Maine businesses, higher rates are another cost increase. Borrowing gets more expensive, which can mean fewer investments, delayed expansions and slower hiring,” he cautioned. “The broader risk is that the Fed ends up weakening growth without doing much to address the supply-side pressures that are pushing prices higher.”