The Fed is lowering interest rates again, but the trend may end in 2025

What interest rate cuts mean for small businesses

The Federal Reserve’s Federal Open Market Committee (FOMC) voted to cut interest rates again on Wednesday, December 18, lowering the target range for the federal funds rate by 1/4 percentage point (25 bps) to a 4 1/4 to 4 1/2 percent range .

The Committee reported that the latest indicators suggest that economic activity has continued to grow at a solid pace. Since the beginning of this year, labor market conditions have generally eased, and unemployment has risen but remains low. Importantly, the economy has made progress toward the Fed’s 2% long-term inflation target, but inflation remains somewhat elevated.

With an uncertain economic outlook, the FOMC is mindful of the risks to both sides of its dual mandate of full employment and the 2% target.

The biggest reason the Fed has cut interest rates is that overall inflation numbers are looking better. It is clear that there was great expectation in the markets that the FOMC would come with this rate cut, and they did just that. The jobs report earlier this month was quite weak, so that also justifies this third rate cut in a row.

Related: Why the Fed’s Lower Interest Rates Will Boost Small Business Earnings

Given the scope and timing of further adjustments to the target range for the federal funds rate, the Fed indicated that it will carefully assess incoming data, the evolving outlook and the balance of risks. Since September, the federal funds rate has fallen a full point from its peak. This is a relatively large drop in a short time. The FOMC must seriously consider whether future interest rate cuts in 2025 could contribute to increasing inflation. The vote was not unanimously approved; this latest reduction was approved by 11 out of 12 FOMC voters.

Related: With interest rate cuts likely, businesses should prepare now to borrow

One thing to keep in mind is that inflation, at just under 3%, is still almost 50% higher than the target rate. It stays sticky.

While this is happening, banks are finding it difficult to make money on loans. They pay more for their deposits, which become more difficult to attract. Meanwhile, the Fed wants to help banks make loans for small businesseswhich creates the majority of jobs in the private sector of the economy.

Related: How small businesses can survive a Trump presidency

As we enter 2025 and the Trump administration returns, the Fed will continue to monitor the implications of incoming information for the economic outlook. One problem in 2024 was inaccurate reporting of job creation in the economy. Months after they were reported, the Bureau of Labor Statistics revised its job creation numbers significantly downward. It is unclear – or at least unproven – why they overestimated the number of new jobs in the economy in the early part of the year.

How should small businesses plan for 2025?

Small business owners’ plans for 2025 depend on two or three things. Obviously, the Trump administration is coming in and it’s going to be a lot more business friendly. We have already seen that there has been a big increase in the confidence of small businesses in the country.

However, inflation remains a challenge. Chairman Powell said that if we see inflation start to rise again, the Federal Reserve will not be able to cut interest rates easily.

But for any business owner who has growth plans and wants to borrow money, now is a better time than at any other time in the last two and a half years. With interest rates already down 1 percent, SBA loans are now the cheapest they’ve been since the pandemic, and businesses that already have variable rate loans outstanding will get immediate cash flow benefits from these lower rates.

Business owners should take a wait-and-see approach to how they plan for the new year. They should look at how the first half of 2025 is going. Looking at the data, 2025 could be quite tough at first. Things should improve in the latter half of the year.

The impact of interest rate cuts will help small and medium-sized banks, which had large exposure to commercial real estate because their portfolios were in fixed interest. As interest rates fall, the market value of the portfolios will improve, providing a relief to them as they have suffered a lot in the past two years.

As more capital is released, I expect lending activity to increase next year. Additionally, I predict an increase in bank mergers and acquisitions in 2025. Further, we are likely to see banks streamlining their branch networks to lower their fixed costs. All of this bodes well for small business lending.

For business owners looking to expand, now may be the right time to add capacity or acquire another business as interest rates have been reduced during the past three FOMC meetings. It will be important to keep fixed costs (rent, mortgage, equipment, vehicles, etc.) manageable as they are difficult to adjust. Variable costs, such as the number of employees and the number of hours they work, are easier to change. The important thing for the new year is to build a business that is efficient.