During Inflation Or Recession, Higher Interest Rates Present Challenges For Small Businesses

The challenge for the Fed, of course, is to reduce inflation that is hurting small businesses' costs structures (and consumer pocketbooks) without cause a recession.

During Inflation Or Recession, Higher Interest Rates Present Challenges For Small Businesses

Jerome Powell, Federal Reserve Chair, speaks at a news conference in Washington on Wednesday, December 14, 2022 at the... Federal Reserve Board Building. (AP Photo/Jacquelyn Martin).Copyright 2022 The Associated Press. All rights reserved.

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%. These events are especially distressing because the Federal Funds Rate, the rate at which commercial banks borrow from each other overnight and lend their excess reserves to one another, has hovered around zero for many years. It was even lower in the first quarter. The Fed's challenge is to lower inflation without causing a recession. FOMC Meeting Date -- Rate Increase (bps) Federal Funds Rate March 17, 2022 -- 25bps -- 0.25 to 0.50% May 5, 20,22 -- 50bps -- 0.75% - 1.00%

June 16, 2022 -- 75bps -- 1.5% to 1.55%

July 27, 2022 -- 75bps -- 2.25% to 2.5%

Sept. 21, 2022 -- 75bps -- 3.00% - 3.25% Nov. 2, 20,22 -- 75bps -- 3.75% - 4.00%

Dec. 14, 2022 -- 50 Basis Points -- 4.25% to 4.500% Although the 50 basis point increase is less than the four previous three-quarter-point increases, the Fed indicated that it was willing to make additional hikes in 2023, even if inflation continues to rise. The Federal Funds rate is now at its highest level since 2008. The Federal Funds Rate is at its highest point since early 2008. (AP Photo/Jacquelyn Martin).Copyright 2022 The Associated Press. All rights reserved.

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 that he had taken "forceful actions" over the past year and that the full impact of his rapid typing efforts so far is still to be seen. We have much more work ahead. The Federal Reserve is responsible for price stability. The economy won't work without price stability. We will not be able to sustain strong labor market conditions for everyone, especially without price stability.

Powell said that he believes that continued increases are necessary to achieve a stance in monetary policy that is sufficient restrictive to bring down inflation to 2%. "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 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 recission is making them nervous.

There are additional obstacles for small businesses looking to raise capital. Although small 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 programme. (Photo by Bill O'Leary–Pool/Getty...[+] Images).Getty Images

Guzman, SBA Administrator, stated that while billions are still being managed in COVID relief, SBA also provided record lending in FY22, helping tens to thousands of entrepreneurs in the country get the funding they need to start, grow and sustain their businesses. The Biden-Harris Administration's work at the SBA addresses inequalities in capital markets and across our economy. We are making progress in expanding our network SBA lenders and eliminating capital barriers for small businesses. This is the foundation of a global competitive economy.