Small business owners might not let higher interest rates dim their optimism

The collective mood for small business owners is on the upswing, and news of slower Federal Reserve interest rate cuts isn’t likely to cut into their optimism much, according to a National Federation of Independent Business official.

Holly Wade, the NFIB executive director of research, said interest rates staying higher for longer than expected will frustrate many small business owners.

But the high borrowing rates won’t be their dominant issue.

“I don’t believe it will be a significant contributing factor to any potential easing of optimism going forward,” she said. “Their main concerns are taxes and regulations, labor participation, and inflation.”

The latest NFIB Small Business Optimism Index jumped above the long-term average for the first time in nearly three years.

The election results signaled a major shift in economic policy, leading to a surge in optimism and certainty among small business owners, according to the small business advocacy group. But the Fed signaled Wednesday that interest rates won’t fall as fast as expected.

The Fed did cut its benchmark interest rate another quarter of a point Wednesday, bringing the rate down a full percentage point since September. This continued the reversal of the higher rates the Fed monetary policymakers implemented between 2022 and 2023 as a lever to tame inflation.

Bankrate Chief Financial Analyst Greg McBride said the Fed showed it will take “a more cautious, deliberate approach in 2025 because of inflation remaining stubbornly high.” And the Fed’s projections now indicate just two interest rate cuts for next year, down from an expectation of four rate cuts in September.

Borrowing costs are certainly a concern for a lot of small businesses, especially those with loans, lines of credit, or products that their customers typically finance, Wade said. But inflation, labor quality and taxes remain their top problems.

The latest NFIB survey showed the highest share of owners since June 2021 see this as a good time to expand their businesses. Wade said that’s unlikely to change because of the expectations of fewer interest rate cuts. A sense of an easier regulatory environment under Trump is enough to keep small business owners feeling positive, she said. And now business owners aren’t worried that the provisions from Trump’s Tax Cuts and Jobs Act of 2017 will expire at the end of next year.

“The expectation is that they will work to extend or hopefully make permanent those provisions, especially the 20% small business deduction,” Wade said.

She said some small businesses have been in a holding pattern over the last couple of years. But she said a lack of growth or hiring had less to do with high financing costs and more to do with general economic uncertainty and difficulty finding qualified applicants.

“It does appear that they were kind of holding off on some of those bigger expenses to see where things were going,” Wade said.

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