What the Fed’s Rate Hike Means for America’s Small Businesses

Small Business Activity Ahead Of Small Business Optimism Report
Employee Amy Merritt prepares a flower arrangement at Flowers By Julia in Princeton, Illinois, U.S., on Monday, June 11, 2012. The National Federation of Independent Business (NFIB) is scheduled to release small business optimism data on June 12. Photographer: Daniel Acker/Bloomberg via Getty Images
Photograph by Daniel Acker — Bloomberg/Getty Images

The Fed’s move recently to start raising interest rates has come and gone with the markets’ blessing. As Wall Street embraces the new normal, the future of the Fed’s monetary policies will need new metrics to ensure shared prosperity for America’s small businesses and the people they employ.

Policymakers must be wary of relying too heavily on high-level indicators like equity indices and inflation measures when weighing their next moves. In many ways, indicators like these mask a critical and worrisome divergence in the economy, where corporate America continues to make steady gains as profits sit near all-time highs and shareholders enjoy the benefits of relatively calm global markets. Meanwhile, small businesses – and the workers they employ – continue on a bumpy and uncertain road out of the Great Recession. In thinking about their next move, policymakers need to focus on those being left behind.

That’s easier said than done, however, considering the fact that the indicators that provide insight into the critical small business segment of the U.S. economy are woefully inadequate. In many instances, experts just don’t collect the right data. And, even when data does exist, it’s made available to policymakers too late to be of any real use.

There are three key measures of the health of America’s small businesses that the Fed should consider as it works to steer the economy forward:

Interest rates on small business loans

Potential interest rate hikes affect the ability of small businesses to borrow the capital they need to open shops, hire workers, and grow. The cost of doing business can be a critical barrier to success; and for many small businesses, debt is a major component of those costs.

Small businesses’ access to credit was hit hard during the recession, with U.S. government data showing an 18% drop in lending to this critical sector. What’s more, commercial lending markets still haven’t caught up to the demand for small-dollar loans under $250,000 that small businesses need most. Small business owners who get loans tend to pay higher rates compared to larger companies, as they are viewed as risky credits.

As the Fed looks at raising rates further, they should track the availability and cost of small business loans. Unfortunately, despite the vast amounts of financial data available today, the government does not actually track loans issued to small businesses. Provisions in Dodd-Frank do require this type of data collection, but unfortunately, these sections of the law have not yet been implemented. As a result, this is an area where policymakers may continue to fly blind for the time being.



Small business employment

Half the people who work in this country own or work for a small business. Understanding how and if interest rate hikes affect the rate at which small businesses hire and retain employees is vital. This understanding could offer an important view into how decisions about monetary policy influence the real economy.

Data on small business hiring – defined as businesses that employ less than 500 people – are collected quarterly by the Bureau of Labor Statistics, but its release lags nine months behind the monthly jobs data for the same time period. This feels like a problem technology can solve by making small business jobs data a higher priority.

Rate of startup activity

Recent research has confirmed that the proportion of startup businesses to all firms in the economy has been slowly declining for decades. And, while there is much fanfare around successful new Silicon Valley startups, those starting a new business on Main Street are having a tougher time. While the underlying causes of this decline are not fully clear, several factors could be driving the problem.

For one, there’s the lack of access to financing and unmanageable college debt that has kept younger would-be entrepreneurs from starting their own businesses. The housing market crash of 2008, which wiped out many homeowners’ net worth and home equity, also impacted a primary source of capital that helped previous generations of entrepreneurs to start new businesses.

Tracking how monetary policy influences business formation across different industries and types of businesses could add another dimension to the Fed’s decision making. Measures of startup activity live in myriad government statistical agencies. Policymakers could gain critical insights by a compiled data-set on startup activity, which could have significant implications on how we measure economic stability and growth.

For future Fed decisions, it may be a mistake to rely only on traditional macroeconomic measures that don’t reflect the health of small business and its critical role in our new economy. Instead, the Fed could benefit from a careful understanding of the effect changes in monetary policy will have on the small businesses that provide the livelihoods for millions of Americans and their families.

Karen Mills is a senior fellow with the Harvard Business School and the Harvard Kennedy School focused on competitiveness, entrepreneurship and innovation. She was a member of President Obama’s Cabinet, serving as Administrator of the U.S. Small Business Administration from 2009 to 2013.

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