How Putting a Hold on the Federal Reserve Rate Affects Small Business Funding

How Putting a Hold on the Federal Reserve Rate Affects Small Business Funding

The Federal Fund Rate is the rate that banks charge each other for over night loans to meet the reserve requirement mandated by the Federal Reserve. In a recent press release the Federal Reserve System has said, “To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.” A Federal Fund Rate between 0% and .25% is outstandingly low and the Federal Reserve System plans to keep it regulated “…at least through mid-2013.”

The announcement begs the question: How will this effect small business funding? The Fed fund rate directly effects L.I.B.O.R. or the London Interbank Offered Rate. L.I.B.O.R. is the interest rate that banks charge other banks for a loan period of a month or longer, and the prime rate that they charge their most trusted customers. Since the prime rate is set by L.I.B.O.R., which is affected by the Federal Fund Rate, a lower Federal Fund Rate will mean a better chance that small businesses will be granted lower interest rates on loans. Banks will also be more likely to loan money because it will cost them less to borrow funding in order to meet the Federal Reserve Requirement, thus giving them stronger motivation to acquire capital to loan. An attempt to hold the Federal Reserve Rate will make small business borrowing more available and less costly in a our currently volatile market.

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