The Federal Open Market Committee, under the direction of Jerome Powell, Federal Reserve Chair, has increased the Federal Funds Rate seven times since November 2022. The cumulative increase has already surpassed 4% this year.
These events are especially distressing because the Federal Funds Rate, the rate at which commercial banks borrow or lend their excess reserves to one another overnight, has hovered around zero for many years. It was even lower in the first quarter. The Fed’s challenge is to curb inflation that is causing small businesses (and consumers) financial distress without triggering a recession.
FOMC Meeting Date — Rate Change (bps) — Federal Funds Rate
- March 17, 2022 — 25bps — 0.25% to 0.500%
- May 5, 2022 — 50bps — 0.75% to 1.0%
- June 16, 2022 — 75bps — 1.5% to 1.55%
- July 27, 2022 — 75bps — 2.25% to 2.5%
- 21, 2022 — 75bps — 3.00% to 3.255%
- 2, 2022 — 75 BSP — 3.75% to 4.0%
- 14, 2022 — 50 BSP — 4.25% to 4.5%
The Fed indicated that it is willing to increase the Federal Funds Rate by 50 basis points if inflation continues, even though this hike is less than the four previous three-quarter-point increases. The Federal Funds rate is now at its highest level since 2008.
Powell stated at Wednesday’s news conference that although October and November showed a welcome decrease, it would take substantially more evidence to support the belief that inflation is on an ongoing downward trajectory.
Recent economic indicators, according to the FOMC, indicate a modest increase in production and spending. Recent job gains have been strong, while the unemployment rate has remained at a low level. The high inflation rate is due to supply and demand imbalances, increased food and energy prices, and wider price pressures.
Powell stated, “Over the course of the year, we’ve taken forceful action… and the full consequences of our rapid typing so far have yet to be realized.” We have much more work ahead. The Federal Reserve is responsible for price stability. The economy won’t work if there is no price stability. We will not see sustained strong labor market conditions that are beneficial to everyone, especially without price stability.
Powell said that “we continue to anticipate that continuing increases will be necessary in order to achieve a stance monetary policy sufficiently restrictive, which is sufficient to return inflation to 2 percent over time.” “Restoring price stability will likely take more stringent policy stances for a while.”
Small business owners were concerned about inflation for much of the year. The September U.S. Chamber of Commerce/MetLife Small Business Index revealed that small business owners are increasingly concerned about inflation. According to the Chamber, 90% of small business owners are worried about inflation. 54% said they are very concerned. This is up from 31% in the previous quarter.
Now we are beginning to notice the results. In the meantime, fears about inflation have been raised, and companies like Meta, DoorDash, and Amazon have announced layoffs. Crunchbase reports that more than 90,000. Workers in the tech sector will have lost their jobs by 2022.
The question is, how long and how often should the Fed raise rates before it causes harm to consumers and small businesses? Right now, this is Chairman Powell’s balancing act. This is a difficult time for small businesses because of the high prices. However, the looming threat of recession makes them nervous.
There are additional obstacles for small businesses looking to raise capital. Although low business loan approval rates are declining, those who get approved for bank loans will pay a higher capital cost, whether that is working capital or commercial real estate loans.
Even though they have been used to paying near-zero interest rates for many years, thriving companies might be able to manage higher interest rates. Businesses in areas that are underserved or owned by minorities and women may have a harder time getting capital. Capital is vital to any small business.
Entrepreneurs may look more to the Small Business Administration (SBA) for funding in the next year. The agency provided funding for small businesses of nearly $43 billion in 2022. It provides more than 62,000 loans through its 7(a loan program, CDC/504 loan program. This program provides long-term fixed-rate financing for major fixed assets to promote job creation.
Guzman, an SBA Administrator, stated that while billions are still being managed in COVID relief, SBA also provided record lending in FY22, helping tens of thousands of entrepreneurs in our country get the funding they need to start, grow and rebuild resilient businesses. Under the Biden-Harris Administration, the SBA’s work addresses inequalities in capital markets and across our economy. We are making progress in expanding our network of SBA lenders and eliminating capital barriers for small businesses. This is the foundation of a globally competitive economy.
