Business Main Street and Monetary Policy

Main Street and Monetary Policy

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How Does Federal Reserve Policy Affect Small Businesses? The most obvious is the Fed’s control over interest rates. The interest rates on loans reported by small businesses are perfectly correlated with the yield on 10-year government bonds. The Fed also controls the rate it pays on excess reserves at banks. The more the Fed pays on those inactive deposits, the less likely banks are to provide a riskier loan for small businesses. The Fed is also setting the tone for the lending environment, with regulatory visits to banks and other guidance through Fed statements. And more broadly, the Fed influences the level of economic activity through the demand for loans and the need or usefulness of loans to small businesses.

For nearly 50 years, the NFIB has asked a random sample of its member firms about their lending experience. Over the years, credit issues have become less important based on owners reporting their main problem running their business.

Inflation was very high in the late 1970s and early 1980s. The Fed drastically increased rates and small business owners said they were paying an average of 19% on their loans. Reported loan interest rates are now at their all-time low, although they are gradually rising. Over time, credit became easier (or other problems became relatively more difficult). In recent years, the percentage of owners who choose credit as their biggest problem has fallen to 1% from a high of 11% in the early 1980s. And during this time, the Fed had set a target rate of 0% – 0.25% for federal funds, while buying massive amounts of Treasury bonds issued by the government to fund the deficit.

Owners are asked to compare the difficulty in obtaining their most recent loan with the difficulty they experienced with their last loan. Interestingly, the onset of the 2008 recession was tougher for owners than the Volcker years. Until the last quarter, reports of problems were at an all-time low. As the Fed became aware of the inflation problem, reports of borrowing problems rose sharply in recent months.

In 1993, a question was added to the NFIB survey asking whether all of the company’s credit needs were met. In the recession period of 2008, demand for loans fell and credit standards were tightened. As a result, fewer owners were satisfied with their credit market experience.

In the years that followed, discontent was mitigated by an extremely expansive monetary policy. Banks had a lot of money and access to very cheap money. That has all ended with the advent of the Fed’s anti-inflationary policies (including tougher bank investigations focused on risk management).

The Fed has made a major policy change this year, from a target of 0% federal funds and major purchases of government bonds to a target of 3.5% (and rising) while shrinking its bond portfolio, a 180-degree turn. This was in response to inflation that was below 2% and soared to almost double digits. The Fed aims for an inflation rate of 2% and will try to balance the supply of goods and services with the demand for them. Most observers think this means a slower economy (perhaps a recession) and rising unemployment, with major uncertainties yet to be resolved.

Shreya Christinahttp://ukbusinessupdates.com
Shreya has been with ukbusinessupdates.com for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider ukbusinessupdates.com team, Shreya seeks to understand an audience before creating memorable, persuasive copy.

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