Historic Rate Rises with More Likely to Follow​

By Jake Rickman​

What do you need to know this week?

On Wednesday last week, the US Federal Reserve raised its federal funds rate by 75 bps (i.e. basis points, equivalent to 0.75%) from a target range of 0.75% - 1.00% to 1.50% – 1.75%. This is the largest single rate hike since 1994.

As Reuters reported on Sunday, 19 June, Federal Reserve officials have indicated that they are prepared to raise the interest rate another 0.75% in July when the Federal Reserve Chairs are due to meet again.

The federal funds rate is the interest that the Federal Reserve charges banks and other lending institutions to borrow money in the short term. When the Fed raises rates, banks pay more in interest to borrow, which in turn is passed along. These rate rises are ultimately why mortgage, credit card, and corporate lending rates are all on the rise.

Why is this important for your interviews?

Given the importance interest rates have on the economy, it is important to develop a view on the situation as it evolves.

That the Fed has decided to hike rates so aggressively indicates that it is serious about bringing inflation down to the levels the market has been accustomed to for the past decade — at around 2-4%.

Presently, developed economies are facing inflation rates at 40-year highs, hovering around 10% in the US and UK.

Inflation can be caused by numerous factors. One compelling analysis is that central banks lowered interest rates when lockdowns began to artificially prop up the financial markets and encourage borrowing activity (and with it, growth). When supply chain issues arising from lockdowns began to bite, this meant there was too much money floating around and not enough goods to buy. This has sent prices of everything from oil to rare metals spiralling.

Central banks like the Fed and the BoE have faced criticism for not acting sooner, given that signs of inflation have been present throughout much of last year.

But even if they had acted sooner, raising rates is not a guaranteed cure. The purpose of raising rates is to slow down borrowing, and with it, the economy. It cannot directly fix supply chain issues.

Indeed, if the economy halts too abruptly, it may compound supply chain woes globally as manufacturers and suppliers pre-emptively scale back activity in anticipation of plummeting demand. In the worst case, this would mirror the circumstances that gave rise (arguably) to the root cause of the inflation in the first place. In such a scenario, central banks would be in a worse position than they were in 2020 because they cannot lower rates as easily.

Why is this important for your interviews?

Deal-making activity is predicated on a bull market. Businesses will buy other businesses if they think the market will support growth. But as the market has slowed, so have deal rates — and with it, fees earned by transactional practice groups.

From a business perspective, law firms need to diversify their income streams by building out practice groups that are counter-cyclical, such as restructuring and insolvency teams, employment, pensions, and disputes.