What the Fed actually controls
The Fed sets a target range for the federal funds rate, the rate banks charge each other for overnight loans.
The Federal Open Market Committee meets several times a year to set that target. It raises rates to slow inflation and lowers them to support growth and employment. The Fed does not set your loan rate directly. Banks and other funders respond to the changing cost of money.
From the federal funds rate to your loan
Banks base many variable rates on the prime rate, which usually moves in step with the federal funds rate.
The prime rate has historically sat a set number of points above the federal funds target, and many business lines of credit and some term loans price at prime plus a margin. When the Fed moves, prime tends to follow quickly, and variable payments change at the next adjustment date.
Other products, such as short-term working capital, price on factors like risk, term and your revenue, and may respond less directly to Fed moves.
Variable versus fixed
Variable rates change as benchmarks change. Fixed rates stay the same for the loan term.
Illustrative example: on a $100,000 variable-rate balance, a one-point rate increase adds about $1,000 a year in interest. A fixed-rate loan avoids that risk after you sign, but you lock in the rate at the time you borrow, which may be higher or lower than later rates.
Review which type you have and whether a cap limits increases. See business line of credit interest rates for how lines are priced.
SBA and bank loans
Many SBA and bank loans are tied to published benchmarks, so rate moves can show up quickly.
SBA lenders often price loans as a benchmark plus a spread within SBA limits, which change over time. Check current limits with the SBA. Our guide to SBA loan interest rates explains how it works.
How to plan around rate changes
Stress-test your payments, consider fixed rates for long-term debt and avoid carrying large variable balances you cannot afford.
- Calculate what your payment would be if rates rose one or two points.
- Prefer fixed payments for large, long projects if cash flow is tight.
- Pay down variable-rate balances when you have extra cash.
- Revisit refinancing when rates fall. See when to refinance a business loan.
- Keep a cash cushion in case payments increase.
What to watch on the calendar
Fed meeting dates and the prime rate are the two signals most likely to touch your loan.
The Federal Reserve publishes its meeting schedule in advance on its website. Check your loan agreement for how often the rate adjusts and which benchmark it follows. Put reminders in your calendar a week before each meeting if you hold variable debt. You do not need to trade on predictions. You only need to know when your payment could change and have the cash to absorb it.
Do not wait for the perfect rate
Waiting for lower rates can cost more than a slightly higher rate on a project that pays back quickly.
Nobody reliably predicts rate moves. If a purchase will earn more than the financing costs, delay can cost you real profit. Focus on payback: total cost, term and monthly-equivalent payment against the added profit.
ROI Funder shows those numbers before you sign. It considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue, with a soft-credit-pull application that takes a few minutes. Compare term loans, which have fixed payments, with a line of credit, which is more flexible.
Frequently asked questions
Does a Fed rate hike raise my existing loan payment?
If your loan has a variable rate tied to prime or a similar benchmark, yes, at the next adjustment. Fixed-rate loans do not change.
Does the Fed set the prime rate?
No. Banks set prime, but it generally moves in line with the Fed's target rate.
Should I wait for rates to fall before borrowing?
Only if the project does not lose profit by waiting. Rate predictions are unreliable.
Can I refinance when rates drop?
Often yes. Check for prepayment penalties and compare total cost.