Last week, the Federal Reserve (Fed) cut interest rates by half a percentage point. This move is a good sign that the Federal Reserve views the fight against inflation to be winding down, and is moving its attention to avoiding a labor market downturn. This is a good sign for businesses and a good sign for workers.
So what does it mean?
A majority of financial markets have already priced in an interest rate cut of this size as it’s what we’ve been expecting for some time. This means that we likely won’t see a large decrease in prices for long-term loans, but small business owners could start seeing relief on much shorter-term credit products like credit card rates. Small business owners who have been waiting for interest rates on long-term loans to drop might start seeing some relief throughout the fall as the Fed expects to continue to lower their rate through the end of the year.
What does this mean for small businesses?
Short term loans should start to become more accessible for businesses throughout the fall, and longer-term capital should continue to become more accessible if the Fed’s intended rate reductions continue into next year. This will be especially good for businesses that are on short-term loan rotations, who can start to see more favorable refinance terms.
What does this mean for the labor market?
The labor market has significantly cooled, with recent monthly job counts coming in lower than expected and major downward revisions in the total number of created jobs. While the unemployment rate is still healthy – below 5% – the Fed has said that it does not want to see any more weakening. This action is intended to spur economic activity and maintain a healthy labor market.
What does this mean for overall consumer spending & optimism?
Since starting to raise interest rates in March 2022 the Fed has been attempting to pull off the “soft landing,” which means it wanted to get inflation under control without hurting the overall economy too much. The Fed is communicating that it thinks it’s succeeding at this. This is likely to boost optimism and may increase spending, and the hope is that this larger cut will support a manageable economy through the end of the year.
