What Interest Rate Increases from the Federal Reserve Means for Supply Chains

To combat rising inflation which is at its highest peak in 40 years, the Federal Reserve has indicated that interest rate increases are inevitable. Indeed, according to Federal Reserve Chairman Jerome Powell has announced that short-term interest rates will rise in March for the first time in four years.

“The Fed uses interest rates as either a gas pedal or a brake on the economy when needed,” said Greg McBride, chief financial analyst at Bankrate, to CNBC. “With inflation running high, they can raise interest rates and use that to pump the brakes on the economy in an effort to get inflation under control.”

The most obvious impacts of these measures in the short term are on consumers, who will see significant cost increases when borrowing money for a home or vehicle, for example. But business supply chains are looking to see strong effects of these measures, as well.

What those effects will be largely depends on the size of the company, as well as its position within the supply chain, and the industry it operates in. A small supplier, for example, will find it much more difficult in this environment to acquire financing options in the face of inventory cost increases, while large-scale supplier will be better equipped but may still feel a degree of strain. Some organizations may be forced to cut corners to reduce costs in other areas, just as through inventory reduction measures, while others with already limited access to capital may accept higher interest rates to maintain operations — a decision that may have dire long-term consequences.

Not all effects are negative, however. As consumer spending habits “cool” in the face of higher prices, this may alleviate some of strain manufactures and suppliers have been feeling with supply chain congestion. The past year has seen critical ports across the globe operating at or well past peak capacity, resulting in skyrocketing lead times. But even this comes with a drawback in the form of increased shipping and storage costs.

The companies that will thrive in this environment — or even just survive, for that matter — are ones who prioritize supply chain resiliency, or ones with high liquidity that are capable of insulating their processes as much as possible from external purchasing factors. Also, interest rates aren’t the only rising costs. Chip manufacturers like TSMC, the world’s largest chip manufacturer, recently announced that chip prices will rise 10%-20% over the next year. This type of financial commitment to bolster on-hand inventory isn’t the most efficient use of capital and will not be a popular option amongst CFOs.

In the electronic component and semiconductor sphere, this translates to maximizing on-hand capital, stockpiling inventory where possible to avoid supply chain disruption, and mitigating rising costs by locking in today’s prices with Inventory Ownership Solutions before the Federal Reserve’s rate hikes go into full effect, along with rising chip prices.

In short, time is short to take action to mitigate the effects these rate increases will have.