By Megan Sayles, AFRO Business Writer,
Report for America Corps Member,
msayles@afro.com
With inflation and interest rates at an all time high, one thing is clear for Carver Federal Savings Bank CEO and President Michael Pugh, we are living in unprecedented times.
Throughout 2022, the Federal Reserve (Fed) has raised interest rates six times in an effort to curb record-high inflation that has continued to plague families and businesses across the nation since the COVID-19 pandemic.
The most recent hike of 75 basis points took the interest rate to the 3.75 to 4 percent range in November. A year ago, it was .25 percent.
Pugh said the rise will most significantly impact homeownership and small businesses, especially for Black and Brown communities.
“If you consider the fact that the way wealth is typically accumulated in this country, it’s done through equity and that equity often happens through homeownership or growing a small business and being able to build it to something that is sustainable, scalable and having an impact over generations,” said Pugh. “For many small businesses and entrepreneurs, it’s not uncommon that they use their own personal credit to help fund their business, particularly within Black and Brown communities.”
Because interest rates make homeownership less affordable and present significant challenges to financing business operations, Pugh thinks the racial wealth gap will be compounded.
The U.S. government rolled out several relief programs to assist families during COVID-19, artificially inflating the country’s economy, and now, the Fed is attempting to curtail a recession by combating inflation with higher interest rates.
Pugh, however, said the recession has already started for some communities.
For consumers, Pugh emphasized the importance of having and sticking to a budget during this time. Budgets provide a compass, helping consumers make financial decisions and differentiate their wants versus their needs, which is critical when disposable income is at a low.
He also recommended that consumers, as well as small businesses, seek credit before they need it, rather than waiting until they are in financial distress. If they delay applying for loans for too long, it may be too late to recover.
While first-time home buyers and small businesses commonly choose their banks based on access and convenience, Pugh said it’s also important for them to consider building relationships with Community Development Financial Institutions (CDFIs).
“CDFIs have been established by the United States Treasury to be advocates and supporters for small businesses, entrepreneurs and underserved communities across our country,” said Pugh. “What I would encourage, and what I’ve continued to encourage is for small businesses and entrepreneurs to identify their CDFIs within their local neighborhoods and start to leverage them for information and resources to help their businesses grow.”
Carver Federal Savings Bank, headquartered in Harlem, N.Y. and founded in 1948, is one of the largest African-American-operated financial institutions in the country, and it’s also a CDFI. Over the past few years, it has provided more than 15,000 people with financial tools to grow businesses and prepare for homeownership.
In Maryland, CDFIs, like Baltimore Community Lending and FSC First, provide comparable services.
As for the fate of the Fed’s interest rate, Pugh said it wouldn’t surprise him if there was another hike before the end of the year.
“I think we’re all a little bit white-knuckled hoping that the economy is leveling off so that we don’t continue to have the rate hikes, but if it happens, it certainly wouldn’t be a shocker,” said Pugh.
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