The Federal Reserve announced a short-term interest rate hike on December 14, a move that was largely expected. But what was not on the radar was the Fed’s announcement that it plans to raise rates three more times in 2017, up from previous expectations of two rate hikes. The Fed’s plan to raise rates signals that economic growth is accelerating. Given the restraint to move rates for most of the last decade, the faster pace for 2017 has many companies concerned about their interest rate exposure.
With the Feds hawkish tone towards further increases, many have asked about hedging strategies to deflect some of the potential interest rate risk. One of these strategies is to utilize an interest rate swap. Now may be a good time to learn more about this strategy, and decide whether entering into an interest rate swap to fix your floating rate is a viable option for your business.
In today’s market, it’s unusual to borrow on a fixed rate basis. More often than not, lending institutions are offering variable rate loans to clients, who are then tasked with utilizing a derivative instrument to fix the rate independently if they so choose — and that’s where an interest rate swap comes into play.
Entering into such an agreement can be an intimidating feat, as these swaps are often complex in nature. By law, banks do not have a fiduciary responsibility to their clients; therefore, it’s the client’s responsibility to ensure they’re entering into a fair agreement.
It is a good idea to consult an independent third party, such as McGuire Sponsel, who can examine price transparency and provide the necessary education and neutral advice. It is not uncommon to see banks’ profits reduced by 50 percent after examining their initial offer against current market values – that is why it is important to find a trusted partner to navigate the process with you. Contact McGuire Sponsel today at firstname.lastname@example.org to discuss how our Financing team can help.