Why the Fed's rate hike could spur healthcare borrowing

(This article was updated at 3:50 p.m. ET.)

The Federal Reserve on Wednesday announced a widely anticipated increase to the benchmark interest rate, the first in nearly a decade.

The increase—a boost of 25 basis points, or 0.25 percentage points—may have little immediate cost to borrowers. But for the first time in seven years, the rate of short term borrowing now hovers above zero. The move also cements the Federal Reserve's confidence in the nation's economic recovery, which has been halting at times and continues to be underwhelming for U.S. workers, who have not seen wages raise as a result.

“This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the economic recovery from the worst financial crisis and recession since the Great Depression,” said Federal Reserve Chairwoman Janet Yellen in a press conference announcing the decision.

The Federal Reserve said that falling unemployment and job growth this year, as well as household spending and business investment growth, prompted the change in monetary policy.

“The committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen,” the Federal Reserve Open Market Committee said in a statement announcing the rate hike.

Stocks responded favorably to the news with a surge in the Standard & Poor's 500 after the announcement. The index climbed to 2074.93 at deadline from 2055.37 prior to the news. Healthcare stocks mostly got a boost after the news as investors responded to the long-awaited increase. “It's a little bit of stability now,” said Dean Diaz, a senior vice president Moody's Investors Services. “It was expected. It happened.”

But markets reacted little otherwise, suggesting that borrowing already reflected the higher rate. “The markets were expecting this,” said Drew Matus, an economist at UBS. “It was very well telegraphed.”

Yellen acknowledged risks to the ongoing recovery from the recession that ended in mid-2009 and pushed unemployment to 10%. But she said she is confident in the fundamental forces driving U.S. economic growth.

“We have been concerned about the risks form the global economy and those risks persist, but the U.S. economy has shown considerable strength,” she said.

The short-term interest rate is expected to reach 1.38% by the end of next year and 2.38% by the end of 2017. Federal Reserve officials will monitor the economy and inflation as it considers future rate increases, Yellen said.

The rate increase is slower than past economic cycles, but not “a particularly worrisome pace,” said Matus.

The expectation that Wednesday's Fed action is only the beginning could bring ambivalent borrowers to the market before the cost to borrow edges upward again. “We've all talked about it and now it's going to happen,” said Steve Kennedy, a senior managing director at investment bank Lancaster Pollard who works with not-for-profit hospitals and senior living borrowers.

That could raise interest rates for not-for-profit health systems, which account for about 80% of U.S. hospitals, but the real pressure on borrowing costs may not come from the Federal Reserve.

Investor demand has outpaced debt issued by hospitals, which has helped keep interest rates low as supply of bonds has been notably smaller than demand from investors. “That really drives what the average hospital is going to pay, way more so than whether the Fed is going to raise interest rates” today, said Pierre Bogacz, a managing director at HFA Partners.

Borrowing has been sluggish even as investor demand continues, thanks to uncertainty regarding capital investment created by changes to healthcare policy, Bogacz said. But hospitals may now look closely at capital projects and consider financing to avoid paying more to borrow later.

Not much will change immediately for corporate healthcare companies, which have already capitalized on the extended period of cheap borrowing to refinance debt and borrow for mergers and acquisitions, said Megan Neuburger, a managing director for Fitch Ratings. “(It's) probably business as usual tomorrow,” she said.