Led by Federal Reserve Chairman Jerome Powell, the Federal Open Market Committee has raised Federal Funds rates seven times in 2022, most recently in November. The cumulative increase this year is already more than 4%.
These events are particularly shocking because Federal Funds rates—the rate at which commercial banks borrow and lend their excess reserves to each other overnight—has hovered around zero for years—as late as the first quarter. The challenge for the Fed, of course, is to curb inflation, which is hurting small business cost structures (and consumers’ pockets), without triggering a recession.
FOMC Meeting Date — Rate Change (bps) — Federal Funds Rate
March 17, 2022 — 25 basis points — 0.25% to 0.50%
May 5, 2022 — 50 basis points — 0.75% to 1.00%
June 16, 2022 — 75 basis points — 1.5% to 1.75%
July 27, 2022 — 75 basis points — 2.25% to 2.5%
September 21, 2022 — 75 basis points — 3.00% to 3.25%
November 2, 2022 — 75 basis points — 3.75% to 4.00%
December 14, 2022 — 50 basis points — 4.25% to 4.50%
While the 50 basis point increase is smaller than the previous four three-quarter point increases, the Fed has signaled its willingness to make further hikes in 2023, albeit smaller ones, if inflation continues. The Federal Funds Rate is now at its highest point since early 2008.
“Inflation data in October and November show a welcome decline, but significantly more evidence will be needed to build confidence that inflation is on a sustained downward path” Powell said at his press conference on Wednesday, December 14.
According to the FOMC, recent economic indicators point to modest growth in spending and output. Job growth has been robust in recent months and the unemployment rate has remained low. Inflation remains high due to supply and demand imbalances caused by the pandemic, higher food and energy prices and broader price pressures.
“During the year, we took strong action…and the full effects of our fast typing so far have yet to be realized,” Powell said. “So we have more work to do. Price stability is the responsibility of the Federal Reserve. Without price stability, the economy works for no one. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that will benefit.”
“We continue to expect that sustained increases will be appropriate to maintain sufficiently restrictive monetary policies to bring inflation back to 2% over time,” Powell added. “Restoring price stability is likely to require tougher policies for some time.”
For much of the year, inflation was the biggest concern for small business owners. This was evident in September from the quarterly US Chamber of Commerce-MetLife Small Business Index Inflation concerns among small business owners reached a new high. The Chamber reported that the vast majority (90%) of small business owners said they were concerned about the impact of inflation on their businesses, with 54% saying they were very concerned, compared to just 31% in the first quarter.
We are now starting to see the effects. Meanwhile, concerns about inflation have been fueled and companies like Amazon, ByDashand meta announced layoffs. The tech sector is feeling the pain as more than 90,000 tech industry workers will lose their jobs by 2022, according to a report from Crunch base.
So the question becomes how much and for how long the Fed must keep raising rates before it hurts both consumers and small businesses. This is the balancing act for Chairman Powell right now. It’s a challenging period as prices are still high, but the looming specter of bankruptcy is making small business owners nervous.
Small businesses looking for capital now face additional hurdles. While bank loan Small business approval rates continue to fallBorrowers who do get approved face a higher cost of capital, whether for expansion financing, commercial real estate loans, or regular working capital.
Thriving companies may well be able to handle higher interest rates, even though for years they grew accustomed to borrowing with interest rates close to zero percent. Businesses in underserved areas and those owned by women and minorities may find it harder to secure capital, which is the lifeblood of any small business.
In the coming year, entrepreneurs will increasingly be able to turn to the Small Business Administration (SBA) for financing. By 2022, the agency reached nearly $43 billion in small business funding. It offers more than 62,000 traditional loans through its popular 7(a) loan programCDC/504 loan program which provides long-term, fixed-rate financing for large fixed assets that promote business growth and job creation., Microloan program (loans of up to $50,000 made through SBA financing intermediaries) loan partners and more than 1,200 investments through SBA-licensed Small Business Investment Companies (SBICs) for Fiscal Year (FY) 2022.
“While the SBA continued to manage billions in COVID relief, the SBA also delivered a record loan in FY22, helping tens of thousands of entrepreneurs across our country with the funding they needed to start, grow and build resilient businesses SBA Administrator Guzman said. “Our work at the SBA, under the Biden-Harris administration, addresses deep-seated inequalities in capital markets and in our economy. We continue to make progress by expanding our network of SBA lenders and removing barriers to capital for small businesses – the foundation of a competitive global economy.”
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