How does the Federal Reserve's interest rate hike affect corporate borrowing costs and investment decisions?

Okay, no problem. Let's talk about this in plain language.

I. Businesses Face Higher Borrowing Costs

You can think of the Federal Reserve as the "bank for banks." The interest rate it sets is the "wholesale price" for banks to borrow from each other. When the Fed raises interest rates, this "wholesale price" goes up.

Banks aren't charities. When their wholesale costs increase, the "retail price" they charge you naturally rises too. When businesses take out a loan from a bank, that's the "retail price."

So, the most direct impacts are:

New loans become more expensive: A company planning to borrow 10 million to build a new factory might have initially faced a 3% interest rate, meaning 300,000 in annual interest. Once the Fed raises rates, the bank's new interest rate for them might jump to 6%, pushing annual interest to 600,000. That extra 300,000 is a tangible cost.
Existing variable-rate loans also get more expensive: Many companies have loans with variable interest rates, meaning they fluctuate with market rates. When the Fed raises rates, the repayment amount for these loans could automatically increase the following month, directly impacting the company's cash flow.
The cost of issuing bonds also rises: Besides borrowing from banks, large companies also like to "issue bonds" to borrow money, essentially giving IOUs to investors. When market interest rates are high, investors will think: "I can get higher interest by just putting my money in a bank. Why would I buy your company's bond if the interest isn't high enough?" So, companies must offer higher interest rates to attract investors, driving up the cost of issuing bonds.

In short, no matter the channel, it becomes harder and more expensive for businesses to raise capital.

II. Businesses Become More Selective with Their Investment Plans

With higher borrowing costs, business owners have to be more careful when spending money.

For every investment project – like opening a new branch, buying new machinery, or developing a new product – business owners weigh it against one question: Can the future return on this project outperform the interest I pay to borrow money?

Let's take an example:

Before interest rate hike: Borrowing cost is 3%. The owner has a project with an expected annual return of 5%. 5% > 3%, there's a profit to be made! This project is worth doing, so let's greenlight it and start immediately!
After interest rate hike: Borrowing cost rises to 6%. The owner re-evaluates the same project with a 5% annual return. 5% < 6%. Doing this project won't just fail to make money; it will lose 1% in interest annually. Wouldn't that be a losing proposition? The owner will immediately decide: "Let's put this project on hold, or simply abandon it."

This borrowing cost acts like a "passing grade" for investment projects, or a "high jump bar." When the Fed raises interest rates, it raises this bar.

The result is:

Less profitable projects are cut: Only those "star projects" with exceptionally high returns can clear the bar; many ordinary projects that once seemed decent are now scrapped.
Investment decisions become more conservative: Businesses will tend to hold onto cash rather than investing it. This is because the "opportunity cost" of spending money has increased. By not investing, at least they won't lose money on interest.
Expansion pace slows down: Plans for building new factories, opening new stores, and hiring new staff will be re-evaluated, or even postponed. This is because such ventures require significant capital investment, and in a high-interest rate environment, both the risks and costs of these investments increase substantially.

In Summary: What Does This Mean for the Entire Economy?

A Fed interest rate hike is like hitting the brakes on an overheated economy.

By increasing the cost for businesses to borrow, it dampens their enthusiasm for investment. When businesses invest less and expand slower, overall economic activity in society cools down. This is typically a measure the Fed takes to combat inflation (when prices rise too quickly).

Of course, hitting the brakes too hard can also lead to an economic recession. That's why every time the Fed decides to raise or lower interest rates, it's a careful balancing act.