Fed Signals Two Rate Cuts in 2025 as Small Businesses Navigate Economic Transition
At the March Federal Reserve meeting this week, the Fed left interest rates unchanged at 5.25-5.50% for the second straight meeting and reiterated their plan for two rate cuts later this year. They acknowledged that economic growth for the year may be slower than forecasted and inflation might trend higher than anticipated, despite cooling to 2.9%. Notably, Fed Chairman Jerome Powell mentioned "uncertainty" five times in his remarks. While in January "uncertainty" referred to the transition in government and policy (and was only mentioned in response to reporter questions), this March, the Fed officially acknowledged that uncertainty in the economy—from declining sentiment among households and businesses to trade policies—will impact the timing of interest rate adjustments. Though uncertainty is always part of economic forecasting, the current level is unusually elevated.
The labor market, which has shown resilience with unemployment holding at 4.1%, remains a bright spot that has allowed the Fed to maintain its approach. However, the University of Michigan Consumer Sentiment Index fell to 57.9 in March—a 27% year-over-year decrease, suggesting consumers are feeling cautious despite strong employment numbers.
With tariff and trade policy driving economic sentiment in the first 100 days of the Trump Administration, Powell noted that an increase in goods inflation is already correlated to tariffs. Tariff proposals on imports from China, Canada, Europe, and Mexico are expected to add pressure to prices, particularly on the consumer electronics, apparel, farming, and manufacturing sectors. The inflation rate spiked in 2022 at 8% and has since declined to 2.9% in 2024. Maintaining and reducing inflation to the Fed's preferred 2% threshold will be challenging amid falling consumer sentiment and evolving trade policies.
Main Street businesses are eagerly watching these economic indicators and how the Fed will navigate this uncertainty. BizBuySell’s Insight Report—which tracks the health of the U.S. small business economy—reveals a disconnect. While inflation has fallen over the last few years, 54.2% of small business owners report they aren't experiencing inflation easing in their day-to-day operations. Additionally, they're eagerly awaiting to see how recent interest rate discussions might provide relief after years of elevated borrowing costs.
Inflation Sentiment Remains High on Main Street
The Consumer Price Index (CPI) shows core inflation at 2.8% for the 12 months ending in February, continuing its downward trend from a peak in 2022. Despite this cooling, the Insight Report reveals a disconnect: 54.2% of small business owners report they are not experiencing an easing of inflation. This perception gap shows that official economic numbers don't always match what small businesses are actually experiencing as they continue to face high costs for supplies, workers, and daily operations.
"Prices are still going up. The cost of the business is still going up; as a business, you cannot raise your prices or you lose out," reported one survey respondent. Another noted, "We have seen some costs increase, especially when it comes to services we buy, such as vehicle and equipment repairs." Small businesses are facing different realities, with some hit harder in specific areas: "Inflation is easing but the threat of tariffs has led to an increase in chemicals of 20% overnight."
Interest Rate Impact on Small Business Operations
The Insight Report also surveyed owners about the Fed's efforts to tame inflation with interest rates. Despite some movement on rates, only 21.32% of small business owners report that interest rate cuts are positively impacting their business, while a substantial 68.77% report no impact, and 9.91% actually report a negative effect. These numbers tell us that most small businesses aren't feeling any tangible benefits from the Fed's interest rate changes yet.
Fluctuations in interest rates impact business owners in a variety of ways, affecting borrowing costs, cash flow, and investment opportunities. Small businesses are typically more vulnerable to funding stress than larger businesses with greater capital reserves and access to diverse financing options.
Lower borrowing costs from reduced interest rates would make loans, lines of credit, and other financing more affordable, helping businesses invest in growth initiatives. One business owner emphasized the urgency: "We need the rates to drop lower so we can refinance our business to a normal rate that isn't crushing us." Another noted a positive impact: "Our SBA loan has a variable interest, therefore the decline helped us have a lower monthly payment."
The impact of interest rate changes extend beyond direct borrowing. As one survey respondent observed, "Lower rates often lead to increased disposable income for consumers, which can boost demand for goods and services, particularly in discretionary spending categories." However, some remain skeptical about whether these benefits are reaching consumers, with one owner noting, "Consumers' borrowing cost has not gone down."
Interest rate pressures combined with other economic factors are forcing difficult decisions. One respondent reported "selling business to avoid long term issues with tariffs making costs rise," while another highlighted the compounding effect of tariffs: "The equipment we use has gone up in price significantly due to tariffs that were put into place in 2018. We have been purchasing used equipment thus far however will need some new equipment in April."
These stories from business owners illustrate how interest rates are just one piece of a complex economic landscape. While small businesses are navigating multiple factors simultaneously—from inflation to tariffs to borrowing costs—many are demonstrating remarkable adaptability. By focusing on innovation, streamlining operations, and exploring new market opportunities, entrepreneurs are finding ways to not only weather these challenges but position themselves for future growth when economic conditions improve.