Fed Cut Interest Rates Amid Weakening Economy, Here’s What Small Businesses Need To Know

The Federal Reserve gave its latest guidance today, lowering the effective funds rate by 0.25 percentage points to a range of 4.00% to 4.25%. This is the first time the central bank has lowered rates in nearly a year. This means it’s now cheaper for consumers and small businesses to borrow money. 

This decision has been anticipated by markets. Last month, Fed Chair Jerome Powell gave a stern signal that a rate cut was imminent. “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” he said. The risks he mentioned referred to stagnant growth in jobs and inflation hovering above the Fed’s 2% goal. 

Here’s what you need to know, and how you can potentially use this news to benefit your small business.

Key Points:

• The Federal Reserve has lowered rates by 0.25%, with potentially more cuts in the future.
• Unemployment and stubborn inflation for goods are trending upward
• All votes favored a rate cut, with more rate cuts likely to finish the year

Why The Fed Is Cutting Rates

This rate cut was widely expected, but it isn’t pointed to one core reason. Powell noted on Wednesday, “The marked slowing in both the supply of and demand for workers is unusual in this less dynamic and somewhat softer labor market.” In fact, there are now more unemployed people than there are available jobs.

In addition, the latest Producer Price Index (PPI) report showed a decline, signaling easing inflation pressures. This drop suggests that input costs for small businesses are stabilizing, which could in turn reduce prices for consumers.

Also, inflation remains elevated above the Feds 2% goal. Powell says uncertainty remains as economic policy around tariffs remains unsettled.

What Lower Interest Rates Mean for Small Businesses

Lower interest rates can provide significant relief for small businesses by reducing the cost of borrowing. This means small businesses can access cheaper capital to fund operations, invest in new equipment, or expand their workforce without facing as heavy a financial burden. For many small firms that operate on tight margins, these savings can be the difference between growth and stagnation.

Beyond direct borrowing costs, lower interest rates often stimulate overall economic activity. Consumers may feel more confident spending when borrowing is cheaper and saving yields less, which can boost demand for goods and services. Small businesses, particularly in consumer-facing industries like retail, hospitality, and services, stand to benefit from this increased spending. 

As for the rest of the year, there are two remaining Fed meetings (October and December) to end the year. After the Fed’s announcement today, projections look to be more of the same, with odds over 80% for further rate cuts in each meeting, according to FedWatch.

Final Thoughts

America’s small businesses have remained resilient in the face of economic pressures in 2025, consistently growing collective profits. However, today’s news means small businesses can prepare to reinvest in their enterprises at a lesser cost.