What the Interest Rate Cut Means for Small Businesses
On Wednesday, December 18, the Federal Reserve's Federal Open Market Committee (FOMC) voted to reduce interest rates once again, lowering the target range for the federal funds rate by 1/4 percentage point (25 basis points) to a range of 4.25% to 4.50%.
The committee noted that recent data indicates the economy continues to expand at a solid pace. While labor market conditions have eased since earlier this year, and the unemployment rate has slightly increased, it remains low. Additionally, progress has been made toward the Fed's long-term inflation target of 2%, although inflation remains somewhat elevated.
Given the uncertain economic outlook, the FOMC remains vigilant to the risks affecting both sides of its dual mandate: full employment and the 2% inflation target.
The primary reason behind the Fed's decision to lower interest rates is the improved inflation data. There was significant market anticipation for this rate cut, and the FOMC followed through. Additionally, the weaker Jobs Report earlier this month further supported the need for this third consecutive rate cut.
In determining the extent and timing of further adjustments to the federal funds rate, the Fed emphasized that it will carefully evaluate incoming data, the evolving economic outlook, and the associated risks. Since September, the federal funds rate has decreased by a full percentage point from its peak, marking a significant drop in a short period. The FOMC must carefully consider whether additional rate cuts in 2025 could potentially accelerate inflation. The vote on this latest reduction was not unanimous, with 11 out of 12 FOMC members in favor.
It's important to remember that inflation, at just under 3%, is still nearly 50% above the Fed's target rate and remains persistent.
At the same time, banks are struggling to profit from loans. They are paying more for deposits, which are becoming increasingly difficult to attract. Meanwhile, the Fed is focused on supporting banks in providing loans to small businesses, which are responsible for the majority of private-sector jobs in the economy.
As we move into 2025 with the return of the Trump Administration, the Fed will remain focused on assessing the implications of new data for the economic outlook. One issue in 2024 was the inaccurate reporting of job creation. Months after the initial reports, the Bureau of Labor Statistics revised its job creation figures significantly downward. The reasons behind the overstatement of new jobs in the early part of the year remain unclear, and it is still unproven why these discrepancies occurred.
How Can Small Businesses Prepare for 2025?