The Fed Interest Rate Cut Could Spur Small Business Growth

The Federal Reserve’s half-point rate cut on Wednesday could promote small business growth. Lower interest rates mean businesses needing money will find it more affordable alongside banks that are eager to lend it.

The Fed rate cut of 50 basis points was larger than the usual 25 basis points, and it’s the first reduction since the Federal Open Market Committee (FOMC) began increasing rates in 2022. The central bank’s target rate now falls between 4.75% and 5%, according to CNBC.

The federal funds rate does not directly affect loan interest rates for consumers and business owners. It influences what banks pay to each other for overnight loans. Yet, when the Fed makes changes to this rate, other interest rates tend to move up or down as well.

Small businesses can potentially benefit from lower borrowing costs. Credit cards, lines of credit, and other financing options are more attractive for businesses looking to expand, purchase new assets, and fund other projects. In addition, refinancing existing high interest debts with a lower rate loan could save a significant amount in interest payments.

When interest rates are high, small businesses often struggle with cash flow problems. Yet, when rates come down, they may qualify for a working capital loan to cover expenses, such as payroll, until things turn around. Businesses can also maintain solid relationships with suppliers without the tension of late or missed payments.

Even though the Fed’s rate cut does not directly affect consumers, it can influence spending. Rates can come down on mortgages and car loans, making it easier for consumers to afford new cars and homes. Lower rates also encourage optimism among consumers, which can stimulate spending on nonessentials like electronics and travel.

During a press conference, Federal Reserve Chair Jerome Powell noted that the future economic picture is still cloudy, but currently it is in decent shape. Inflation is lower, and the labor market remains solid. This is a sigh of relief from small business owners struggling with increased expenses and high interest rates on loans.

Unemployment statistics, inflation rate, and even international developments influence the rate decisions made by the FOMC. Depending on the data, the Fed may announce another rate cut by the end of the year.

“In considering additional adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” said Powell, per Forbes.

It’s still too early to tell if the Fed’s rate cut will have a long-term effect on small business growth. Yet, small businesses do impact the U.S. economy. Lower rates could put business owners in a spending and expanding mindset, setting off a chain reaction that pushes the economy in a positive direction.