Interest Rates: Impact on Small Business
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What Fed minutes and recent headlines set the stage for this episode?
With your money briefing, I'm Charlie Turner for The Wall Street Journal. In a moment, J.R. Whelan will talk with TD Bank's Jay DeMarteau about the impact of lower interest rates on small businesses. First, here are some money headlines. The Federal Reserve released the minutes Wednesday from their July policy meeting. In them, Fed officials saw their move to cut interest rates last month as a recalibration rather than the start of a more aggressive easing cycle and were reluctant at the meeting to say how future moves would unfold. The minutes also showed officials believed uncertainty surrounding the Trump administration's trade policy wasn't likely to let up anytime soon, creating a persistent headwind for the U.S.
economic outlook. As a result, officials didn't spell out in much detail how they might act to lower rates in the months ahead, but stressed the need to be flexible. Bad news for investors. There's been a slowdown in corporate stock buybacks, a key pillar of the stock market. U.S.
How did the July rate cut change borrowing costs for small businesses?
corporations are repurchasing their own shares at the slowest pace in 18 months, a potential sign of more volatility ahead as the buyback bonanza from the corporate tax overhaul wanes. S&P Dow Jones Indices projects that companies in the S&P 500 repurchased about $166 billion of their own stock in the second quarter. down from $205.8 billion in the first quarter and down from $190.6 billion in the same period a year earlier. That marks the lowest total since the fourth quarter of 2017 and the second straight quarter of contraction.
We've discussed plenty of times here on Your Money Briefing the impact of lower interest rates on banks. But now let's talk about the impact on small business. And let's bring in Jay DeMarteau. He's TD Bank's head of commercial specialty segments and is on the line with us with some details.
How do lower rates affect the credit and debit sides of a small business balance sheet?
So, Jay, in July, the Federal Reserve lowered interest rates for the first time since 2008. What opportunities does that unlock for small business owners?
If you think about a small business, they really have kind of two sides of their balance sheet. You know, their debit side, which is their kind of houses their assets, things like cash, investable securities, things like that. And then their credit side, which is debt. and it really kind of hits both sides of their balance sheet. If you think of the credit side first, most small business loans, and you know, look, the term small business is bantered around a lot with many different definitions. Here at TD Bank, we define someone as a small business segment participant if they have revenues less than $5 million annual revenues. And when you think of that segment, they tend to be very small. So when they get a loan, their loans are primarily prime based and prime moves very in sync and it's correlated to the Fed fund rate.
So the cost of borrowing should have gone down by 25 or more basis points when Jerome Powell did what he did. So in an interest rate decreasing environment, a lot of small businesses. Well, let's use the term businesses, right?
When should small business owners lock in fixed rates versus take variable loans?
Larger businesses in the community space start to think about, well, should I borrow now or can I wait? Because rates are going to keep going down now. There are two types of loans generally. There's many different types of loans in terms of structures, lines of credit, mortgages, things like that. But when you think about rates, you can either lock in your rate and get a fixed rate loan or you can play interest rate changes and have a variable rate loan. So if interest rates are going to keep going down, it's always smart to wait and take advantage of and try to get the lowest fixed rate loan that you can.
Now, Jay, the rates have been low for a while. And so these have been good times for small business owners. And I suppose, you know, if you're an owner in this environment, it's good now to strike while the iron is hot.
You know, that's true. And I would tell you, J.R., that if you look back in the late 70s and early 80s, the prime rate was in the 20s. You know, it was five and a half a month ago.
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Chapters
7 chapters
1
What Fed minutes and recent headlines set the stage for this episode?
0:06–1:04
2
How did the July rate cut change borrowing costs for small businesses?
1:04–2:02
3
How do lower rates affect the credit and debit sides of a small business balance sheet?
2:02–3:23
4
When should small business owners lock in fixed rates versus take variable loans?
3:23–4:26
5
What are practical steps for small business owners to prepare for borrowing?
4:26–5:49
6
How does small-business optimism and tax policy influence borrowing and hiring?
5:49–7:02
7
How are labor shortages and growth challenges shaping small business expansion?
7:02–8:45
Speakers
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