How the Fed’s Rate Increase Will Impact Small Business in 2016

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On Wednesday, December 16, 2015, The Federal Open Market Committee (FOMC) unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent. During a time of recession and a slow-jobs-growth recovery, the Fed had continued to drop rates lower with hopes of spurring the economy. (The FOMC is composed of the board of governors, which has seven members, and five reserve bank presidents.)

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The rate hike’s impact on small business

The rate increase is minimal and has been long anticipated. While it will obviously ripple out to raise interest rates on all types of loans from business lines of credit to the interest charged on credit cards, such increases will be minimal at first, in the range of .25 percent, according to most experts.

• Loans (like lines of credit) tied to floating rates like (like a bank’s “prime rate”) will increase immediately, but minimally. For example, shortly after the Fed’s announcement, Wells Fargo raised its prime rate to 3.5 percent, from 3.25 percent.
• The interest rate on all bank loans will increase, but minimally (25–50 basis points) at first.
• Banks that have backed off lending to small businesses may return to the market (stressing the word “may”).

Longterm impact of interest rate increases

The recession, slow jobs-growth recovery and the decline in oil prices have kept inflation under control, enabling the Fed to ignore its historic concern: inflation. Jobs growth has been a greater concern, according to Fed Chair Janet Yellen.

“I think the first thing that Americans should realize is that the Fed’s decision today reflects our confidence in the U.S. economy,” Yellen said in a press conference after the rate hike. “We believe we have seen substantial improvement in labor market conditions and while things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement.”

If Yellen is correct and the economy continues to grow, the Fed will continue to increase rates from their historic lows. This will increase rates for car loans, small business loans, credit cards, corporate bonds, and other similar loans.

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(Photo: Day Donaldson via Flickr, CC BY 2.0)