Fed Rate Increase a Worry for Small Business? No, There Are Bigger Concerns

By at 10 September, 2015, 11:13 am

Federal Reserve

by Raymond J. Keating-

Poke around financial market news of late, and it’s nearly impossible to not read or hear predictions about whether or not the Federal Reserve will inch up the federal funds rate (the overnight interest rate at which depository institutions lend reserve balances to other depository institutions) at its September 16-17 meeting.

The State of Play 

The Fed, of course, pushed the fed funds rate to near zero – at a target rate of 0.0% to 0.25% — in December 2008. And it has remained there ever since.

Assorted talking heads, analysts and economists around the globe apparently are quite nervous about the impact of a tiny edging up in the fed funds rate. In a September 7 Wall Street Journal report, it was noted:

“In early August, after a strong July jobs report, many market participants saw a Fed move in September as increasingly likely. Now, the September meeting looks like a cliffhanger. Some officials are ready to move but others are reluctant.”

And referring to an interview with John Williams, president of the Federal Reserve Bank of San Francisco, the article went on later, “If a new shock hits the economy, the Fed has little room to provide stimulus with interest-rate cuts because rates are already pinned near zero and can’t go much lower. One way to address that problem is to give the economy momentum by keeping rates low for a long period.”

Let’s be clear about this: Beyond a short-term market reaction, this minor Fed decision does not matter to the economy and to small businesses.

The Reality 

Why? Because the Fed will still be running historically loose (previously unimaginable) monetary policy for the foreseeable future. Consider that the monetary base stood at $4.06 trillion in early September, with total bank reserves at $2.74 trillion. That compares to the monetary base standing at roughly $840 billion in July 2008, with bank reserves at a mere $45 billion.

Let’s also understand that the Fed, in fact, has done nothing to boost the U.S. economy with its loose money policies of the past seven years. In fact, that’s actually the best-case assessment. In reality, expanding the monetary base at such an unprecedented rate and to an unimaginable level has added to the level of economic uncertainty for investors, businesses and entrepreneurs. The lion’s share of the expanded monetary base – that is, nearly two-thirds – effectively sits in bank reserves. What will happen with those reserves, and the potential impact on inflation, is simply unknowable at this point. But Economics 101 tells us that if those reserves begin moving out into the economy, it will not be pretty.

So, no, a possible tiny change in the fed funds rate simply does not matter to small businesses and the economy. There are bigger things to worry about in terms of monetary policy as the mystery of the monetary base and bank reserves continues to loom.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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