Any interest rate cut in the US would be good – but don't expect miracles | US small business

IInflation is falling, the labor market is cooling, and it looks fairly certain that the Federal Reserve will cut interest rates in September. But will cutting the federal funds rate—the interest rate the Fed charges its member banks and which is a key tool for controlling the money supply and inflation—have a significant impact on small businesses? Sorry to be the bearer of bad news, but that's not really the case.

The Fed raised that rate 11 times in 16 months – an unprecedented increase – and the resulting impact was significant. By combining that rate hike with a reduction in bond purchases, the central bank managed to reduce its balance sheet by 20% during that period, while also reining in the country's money supply after significant increases. There is still a long way to go (the Fed's balance sheet is still significantly higher than it was before the pandemic), but no one can deny the results of the central bank's actions.

The spending explosion from government stimulus programs in 2021 and 2022 was a major headwind to the Fed's efforts to bring inflation under control. Despite this, the Consumer Price Index – the common yardstick for measuring inflation – peaked at 9% in 2022 and has since fallen to 2.9%.

Consumers and businesses are still trying to catch up with rapid and significant increases in some costs like insurance, rent and child care, and the rate is still above the Fed's 2% target. But it's heading in the right direction. Unemployment has remained relatively low and the economy has not fallen into recession. Fed Chair Jerome Powell and Treasury Secretary Janet Yellen may have misjudged the impact of inflation in 2021 (remember: “it's temporary”), but they're doing a good job of managing the problem.

Some have paid the price for these measures, however. With the base rate at 8.5% – the highest in decades – my small business customers are now paying up to 12% for new financing. That is when they can get the financing. For many, this has become much more difficult as banks more closely scrutinise their customers' ability to service their loans in this higher cost environment.

The country's real estate industry is also facing similar problems. Mortgage rates are hovering around 6-7% and many potential buyers have stayed away from the market because they don't want to replace their existing mortgage with a new one that will cost them three times as much. The supply of existing homes has declined, home prices are at an all-time high and housing affordability has fallen to an all-time low. This affects not only builders but also all small businesses that directly and indirectly benefit from real estate transactions, including real estate agents, mortgage brokers, home inspectors, title insurance providers, contractors and designers.

But if things continue as they are, Powell will probably propose further small cuts in the benchmark interest rate. Will that save the day for small businesses? Not really. At least not immediately.

A quarter-percentage point cut in the federal funds rate won't make much of a difference in a company's repayment schedule or its ability to get loan approvals. A similar cut in the average mortgage rate still means that rates remain at a level that is several times higher than what many homeowners are currently paying. The stock market has already built in its expectations for a rate cut, so any boost to our retirement plan portfolio from the rate hike frenzy will mostly be short-lived.

No one is complaining. A reduction in interest rates – no matter how small – is a step in the right direction. Fingers crossed, let's hope that the U.S. economy (and the consumers who support it) can at least keep humming along long enough to absorb further rate cuts without heating up too much and triggering inflation again. A sub-5% mortgage rate environment will definitely unleash pent-up demand for home buying and selling, which will be a godsend for the real estate industry. A two-point cut in the federal funds rate will free up more capital for small businesses and for some of the millions of fledgling entrepreneurs looking to grow.

Interest rates do matter. In a capitalist economy, the cost of capital is one of the most important factors in investment and growth. Small, incremental cuts won't change everything immediately. But over time – and as long as they last – we'll all see the positive effects.