Federal Reserve Chair Jerome Powell announced on Wednesday, May 7, that the central bank’s Federal Open Market Committee (FOMC) decided unanimously to keep the benchmark federal funds rate at 4 ¼ to 4 ½ percent. Thus, interest rates will not go down, as President Trump has been calling for.
The Fed continues to assess the impact of tariffs on inflation, which is a major factor considered when setting interest rates. Although President Trump has pushed for lower rates since taking office again on January 20, the FOMC officials are waiting to see how much Trump’s much-discussed and anticipated tariffs will push inflation higher.
The FOMC seeks to achieve its dual goals of maximum employment and inflation at the rate of 2% over the long run. In considering the extent and timing of adjustments to the current target range for the federal funds rate, the Committee examines incoming data, the evolving outlook, and the balance of risks.
“The tariff increases announced so far have been significantly larger than anticipated. All of these policies are still evolving, however, and their effects on the economy remain highly uncertain,” Chair Powell said at his press conference in Washington, DC, following the FOMC’s decision. “As the economic conditions evolve, we’ll continue to determine the appropriate stance of monetary policy based on the incoming data, the outlook and the balance of risks. If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.”
Powell said that the effects on inflation could be short lived, reflecting a one-time shift in the price level. However, he warned that it is also possible that the inflationary effects could instead be more persistent. He said avoiding that outcome will depend on the size of the tariffs’ effects, on how long it takes for them to pass through fully into prices, and ultimately, on keeping longer term inflation expectations well anchored.
Related: What Trump’s Tariffs Will Mean For Small Businesses
At a time of economic uncertainty and signs of inflationary pressures, it is unlikely that the Fed will change its monetary policy anytime soon. The Committee decided to maintain the target range for the federal funds rate. Lowering rates could make inflation go even higher, so until the impact of the tariffs is known, the central bank may keep rates as they are. The FOMC’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
“The economy looks like it’s growing at a solid pace. The labor market appears to be solid. Inflation is running just a bit above 2% so it’s an economy that’s been resilient and is in good shape,” Chair Powell said. “We don’t think we need to be in a hurry. We think we can be patient, watching the data. We do think we’re in a good position where we are to let things evolve and become clearer in terms of what should be the monetary policy response.
Should businesses borrow money at today’s interest rates?
Many factors determine whether or not a business owner should borrow money. Interest rate is an important factor, but in many cases, it is not the most important one.
For instance, if a business opportunity arises in which borrowing money will help fund expansion of production capacity, a new product line, purchase of inventory at an attractive price, or acquisition of a competitor, it’s a good time to borrow.
Related: Four Reasons Why High Interest Rates Hurt Small Businesses
Some companies that deal in foreign-made products and parts may have already borrowed money in order to purchase items from countries before the tariffs are finalized. Or they may have found suppliers based in countries other than China, which is subject to the highest rates (145%). By doing so, companies could mitigate the pain of passing along the cost of tariffs to customers who possibly are becoming more price sensitive.
Manufacturing businesses that experience a breakdown of machinery vital to production capabilities or the loss of a vehicle required for distribution, may have no choice other than to borrow money to fix or replace their equipment. If this is the case, borrowing is advisable to avoid disrupting operations.
Naturally, companies with regular positive cash flow, low debt utilization, and low debt-to-income ratios will have an easier time borrowing – even at relatively higher interest rates – than companies that are financially struggling. It’s important to keep in mind that the near-zero interest rates available through much of the 2010s and immediately after the COVID pandemic hit in 2020 may never occur again. Anyone sitting and waiting for a 1 or 2% interest rate may wait a very long time.
What businesses should not borrow money right now?
If your company has poor cashflow and/or a less than stellar credit rating, now is not the time to borrow. If you can secure funding, it may come at a high cost of capital since lenders are taking on added risk by lending it to you.
If you are having a hard time paying your current debts, it makes little sense to take on more obligations – unless you have the opportunity to refinance existing obligations at a lower rate.
If your business is solid but you are anticipating a slowdown later in the year, borrowing might not be advisable at this point. Instead, now may be the time to focus on looking for cost savings by finding new sources of products, negotiating better terms with vendors, or scaling back workers’ hours (because it will likely be difficult or illegal to cut pay rates.)
Businesses should consider borrowing at today’s rates if:
- The expected return on investment exceeds the cost of capital.
- The business owner is confident that the company is in a strong enough financial position to repay the debt.
- If there is an economic advantage or crucial business reason to borrow now, instead of waiting.
Chair Powell said the economy is “in a good place” and that the FOMC will “wait and see” how the economy performs before the Federal Reserve will consider lowering interest rates again. Business owners may also want to take a wait and see approach before taking out a small business loan.
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