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The Federal Reserve announced it will lower the effective federal funds rate by 0.25% to end the calendar year. This is the third rate cut since September after the Fed raised rates at historic speed to tamper inflation post-pandemic.

This is great news for consumers and small business owners who are looking to borrow money. As interest rates come down, the cost of borrowing goes down as well.

While this marks three rate cuts to round out the year, future rate cuts in 2025 may be harder to come by.

Here’s what this means for you and your business.

Key Points:

• The Fed Funds Rate has now come down by 1% since September

• Fed is projecting two more rate cuts in 2025
• Small business owners remain optimistic despite a difficult 2024

Federal Reserve Lowers Interest Rates Three Times to End the Year

After a record-breaking rate hike to stop inflation in recent years, the Federal Reserve ends the year by cutting interest rates by a cumulative 1 percentage point over the last 3 FOMC meetings. This puts the federal funds rate to 4.25-4.50%.

This rate is what banks and lenders use to charge borrowers interest, including the annual percentage rate (APR) on mortgages, credit cards, and business term loans.

This decision follows the Consumer Price Index reading last week showing inflation at 2.7%, above the Fed’s goal of 2%. This figure has been ticking upward since September. Additionally, the Fed projects this goal won’t be reached until 2027 as worries of economic policy from the new administration could be inflationary.

What This Means For Small Businesses

Today’s news is fantastic for small business owners looking to get a loan. A drop in interest rates means the cost of borrowing funds is now cheaper, including SBA loans and term loans. And as the cost of capital drops, the demand will follow.

A September Wall Street Journal story featured several businesses left without necessary funding due to high rates. Now, the flood gates appear to be opening for small business operators who are ready and able to make the capital investment.

What’s To Come

The new year eagerness is palpable from the small business community after a financial squeeze in 2024. According to the Biz2Credit Small Business Earnings Report, operators have seen their lowest earnings since 2020.

Despite this, after President elect Donald Trump won the election, the NFIB Small Business Optimism Index rose 8 points.

“The election results signal a major shift in economic policy, leading to a surge in optimism among small business owners,” said NFIB Chief Economist Bill Dunkelberg. “Main Street also became more certain about future business conditions following the election, breaking a nearly three-year streak of record high uncertainty. Owners are particularly hopeful for tax and regulation policies that favor strong economic growth as well as relief from inflationary pressures. In addition, small business owners are eager to expand their operations.”

Interest rates will continue to be a large focus for small business owners. 28% of small business owners are planning to spend on improving their businesses in the next six months, up six points from October, according to the NFIB Index. Fed Chair Jerome Powell made clear after this third rate cut in a row that the cental bank will be cautious with future cuts in 2025.

Final Thoughts

Today’s news is largely an exciting one for America’s 33 million small businesses that have endured significant economic pressures in recent years. But as we turn the page to 2025 with a new administration, a slew of impacting policy proposals, more potential rate cuts, a new head of the SBA, and the continued battle against inflation, there is plenty for small business owners to think about.

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