I haven’t written about the impact of interest rates on building broadband for many years. But it’s a topic that has increasingly been coming up in conversations with ISPs. That’s happening for several reasons. First, interest rates leaped upward in 2022 and have stayed at the higher rates. We’re also in a time of economic uncertainty, and banks have gotten tighter and are making it harder to borrow money. Adding to uncertainty are worries by many economists of increasing inflation and overall job losses in the economy.

Consider the following chart from the Federal Reserve that shows the federal funds effective rate. This is the rate at which the Federal Reserve loans money to large banks. Banks then charge higher interest rates for commercial lending, car loans, mortgages, and infrastructure.

We’ve been extremely lucky to have a long, unprecedented stretch of low interest rates. The federal effective rate dropped to near zero at the beginning of 2009 and stayed incredibly low until 2022, other than a blip upward to 2.4% at the beginning of 2019. I say unprecedented, because the last time the fed rate stayed low for any length of time was in the 1950s, which was due to huge government spending used to stimulate and mend the economy after World War II.

I don’t have a crystal ball, so don’t take anything I say about interest rates as any more than my private musings. But I read what economists have to say, and the majority say that there is a higher possibility of higher interest rates than of lower ones. There are more looming negatives in the economy than potential positives. That’s not to say that interest rates can’t drop, but the consensus of  economists is that steady or increasing interest rates are more likely.

There is no one negative trend that might keep interest rates high, but rather a series of factors. Tariffs are adding to inflation. The dollar is starting to weaken against other major currencies. The federal government wants to transfer some of the costs for healthcare, education, and even disaster relief to the states. The federal government has directly cut jobs, but there are even more job cuts from contractors and grant recipients. AI data centers are putting upward pressure on electric rates. At the same time, the AI industry is promising that big companies can use AI to decrease staffing, at least in the short run. None of these factors alone will force up interest rates, but together they create a lot of pressure.

The interesting thing is that we tend to think that interest rates are high today, but rates are not out of line with historical trends when seeing that interest rates were 5% or higher for most of the period between 1967 and 2000.

The interest rate has a huge impact on broadband infrastructure projects. I’ve worked on hundreds of business plans to fund new infrastructure construction, and interest rates are almost always one of the most important variables. I can recall a number of proposed projects in the 1990s that got shelved, waiting for lower interest rates.

Industry news is full of stories about huge national fiber expansion plans, but much of this expansion is being funded by private equity. That’s not an option for most of the ISPs I know. It’s worth noting that the same factors that put pressure on interest rates also put pressure on private equity. It’s going to be interesting to see how many of the 3-5 year plans for fiber expansion by big ISPs actually materialize if interest rates increase very much.