Inquiring Minds Ponder Decreased Interest Rates as a Desirable Scenario

Desire for Reduced Interest Rates Prevails Among Many

Small business loans have been a vital lifeline for many entrepreneurs, but their interest rates have historically varied significantly. According to the National Federation of Independent Business (NFIB), interest rates for small businesses have ranged from nearly 20% in the 1980s to as low as 4% in 2020.

The volatility of mortgage interest rates is another noteworthy aspect. As illustrated by Chart 1, these very long-term loans can be quite unpredictable over time. Mortgage interest rates are particularly sensitive to Federal Reserve (Fed) policy.

The Fed, tasked with maintaining maximum employment and stable prices, has a challenging job. This dual mandate includes ensuring low inflation, which in turn brings about low interest rates. Conversely, high inflation can lead to damagingly high interest rates, as demonstrated by the average interest rate reported on small business loans over the past 50 years.

Achieving full employment is considered a responsibility of fiscal policy, while inflation is the province of monetary policy. The NFIB's surveyed small business owners are proactive in their search for favourable loan terms, actively seeking opportunities to refinance with more favourable terms when interest rates change.

Small firms often utilise multiple financial institutions for their financial services. More than half of all small firms, according to a 2005 NFIB study, use at least two financial institutions. Most small business loans are made by commercial banks, many of which are small, community banks.

However, the specific information on which banks have issued the most small business loans in the US market in recent years is not readily available.

It's important to note that banks lend out their depositors' money and share the interest revenue from the loans with their depositors. U.S. Treasury Bonds, loans to the government, are held as assets in individual investment portfolios.

The Fed sets its policy rate, which specifies how much it will pay on excess reserves that are deposited by banks at the Fed and not otherwise loaned out. The higher this rate, the more inclined banks are to keep safe reserves at the Fed rather than make a more risky loan to a real business that will put the funds to work.

Other challenges facing small businesses include labour costs, taxes, insurance costs and availability, and government regulations and red tape. In the NFIB's most recent survey, 26% of owners identified labour costs as their most important business problem, while taxes ranked third with 14%. Inflation and labour quality tied at 9%, making them the most important business problem. Insurance cost and availability received 11% of the votes, and 22% of owners selected government regulations and red tape as their most important business problem.

The Fed is currently under fire for its "dual mandate" of maintaining maximum employment and stable prices at the Fed's annual 2% inflation target. This controversy underscores the complexities involved in managing the economy and the impact of monetary policy on small businesses and the wider economy.