This past Wednesday, the Federal Reserve cut interest rates by a quarter-point for the third time this year. The Fed typically cuts interest rates in an attempt to boost a slowing economy. According to the Bureau of Economic Analysis, U.S. GDP slowed to 1.9% growth in the third quarter of 2019, down from 2.0% in the second quarter. While it’s a minor dip, a report from CNN notes this is the first time in over a year that U.S. GDP has dipped below 2%
While the economy remains relatively strong for now, market analysts have been hinting at an economic slowdown for a while. A report from NPR suggests that ongoing trade tensions with China have slowed overseas demands of U.S. goods while domestic challenges, like an on-going strike at General Motors and several investigations into Boeing’s now grounded 737 Max jets, have also hampered growth.
What it means for loans:
So, if these latest rounds of cuts indicate a slowing global economy, what does that mean for your small business? In short, it’s a bit of a mixed bag. Low interest rates usually mean less expensive loans. That sounds great for small business owners on the surface, but during a period of economic downturn, banks take on more risk when handing out a loan so you may find lenders a bit reluctant to grant loan applications if the market continues to fall.
What it means for credit cards:
In addition, your business credit card may also see a lower prime rate--which, according to the Fed, is set by individual banks but many will set their prime rate based on the federal funds rate established by the Federal Open Market Committee--but this likely won’t help decrease your credit card debt. A report from WalletHub notes that the Annual Percentage Rate (APR) on credit cards remains high, on average close to 20%. That number may dip slightly with Fed Rate cuts, but it likely won’t save you much in paying off your debt.
If you’re struggling with high credit card debt Ted Rossman, an analyst at CreditCards.com, told CNBC on the day of the latest rate cuts, “transfer your existing high-rate credit card debt to a new card with no interest while you still can.”
What it means for your business’s bank accounts:
Your business’s bank accounts are an essential part of your operations and having a high deposit rate helps you get the most return on those savings. Each bank sets its own deposit rates, however, many are likely to cut those rates when the Fed cuts interest rates.
Deposit rates for most checking accounts, for consumers and businesses, are generally very low, typically less than 2%. However, some high-yield business savings accounts can earn more interest. But according to Fundera, there’s often a downside associated with business savings accounts. Fundera says there are usually tight restrictions on a business savings account, like large minimum deposits, a limited number of withdrawals, and service fees.
The bottom line is that rate cuts are intended to increase access to credit, but since these cuts may signal a slowing economy the reality could be different. Ultimately, if you do need to take out a loan or apply for a new credit card, take advantage of the situation now while the economy remains relatively strong.
By Emily Lazration
Emily is the Content Marketing Specialist at CoverWallet, a tech company that makes it easy for businesses to understand, buy and manage commercial insurance online. Emily has previously written for TSheets, Fundera, and Ooma.
Editorial note: The opinions or recommendations in this article are those of the editorial team alone. They haven’t been reviewed, approved, or endorsed by any of the companies mentioned above.