The FED vs US Business

Sometimes when politicians lack imagination, expertise and confidence, they’ll look to inferior policies to solve vexing economic problems. Or they may have ulterior motives — political.

As we know from the size of the national debt, debt interest payments, and trade deficits, US politicians make really poor choices. Overspending is a bad decision especially when not spent on productivity. Anti-US business policies is another. Then to calm the inflation from overspending a “bull-headed” FED asserts that raising interest rates is the only way to counter inflation and bring financial health to the nation.

As the 12 damaging effects of high interest rates listed below show, high interest rates have a caustic effect on stock markets, housing markets, consumer spending, and tax revenue for governments. They hurt everyone.

And a FED rate of 4.5% is too high. From 2009 to 2017, the rate was near zero and it generated strong economic growth and a bull stock market run. Additionally, inflation during the Trump 1.0 era was low.

And during that period of rapid growth, particularly the Trump first presidency, inflation was low.

Small Business Wealth and Spirit Crushed

The impact at the ground level in American’s lives is profound and far-reaching, particularly for small and medium-sized enterprises that form the backbone of the economy. There’s always a big lobby for high interest rates by Democrats, bankers, and bond buyers.  But for anyone else, high rates are a business-killing plague that sends the economy and our hope into a death spiral.

And for stock market investors, high rates prevent the markets from their natural evolution in support of a growing, healthy economy. Interest rates are a major factor in the 5 year stock market forecast.

Let’s review the assumptions that are made by politicians, bankers and corporate CEO’s about interest rates on a practical, easy to understand level. That way, we might spot the deceit and then establish a new economic strategy to help solve America’s massive economic and fiscal problems.

Mega Corporations Love High Interest Rates

The fact is, Amazon, META, Google, Apple, Costco, Walmart, Nvidia, Bank of America, Goldman Sachs, NBC, and so many others have excelled in the high-rate environment these last two years. Have you wondered why that happened?

The fact is, interest rates only climb when the Fed governors want to suppress the US economy, because “someone” benefits from that. The fact is, high rates themselves cause inflation on their own by raising credit costs and discouraging new US production which would balance out supply vs demand. You’ll find a full list of negatives from high interest rates listed below.

The FED’s J Powell is calling for higher for longer interest rates now, in response to the latest vascillating CPE, CPI and jobs data. Unless President Trump can get to work on growing US production, inflation will be persistent. If SMB’s can’t access capital, their productive capacity is sabotaged.

Rotation to Small Caps Held Back by High Interest Rates

As Tom Lee of Fundstrat Advisors pointed out in a CNBC interview today, small caps have been the worst-performing group for 10 years, a record-losing performance. While stock market forecasters suggested a broadering rotation out of Mag7 type stocks to small caps, it hasn’t happened. They weren’t expecting high for longer and believed inflation could be beaten by 2025. NewEdge’s Cameron Dawson also on CNBC and Chris Grisanti, chief market strategist at MAI Capital both reiterated their belief in a rotation out of Mag7’s to small caps.  Mag7’s are still climbing, small caps are not.

The effect of high borrowing rates on small businesses makes capital projects undoable and too costly.  Right now, the burden of government irresponsibility is solely on the backs of small businesses and microbusinesses (working Americans). And small business owners are taking the gut punch without complaint. Not a good response.

Stock market pundits and analysts speak of the harm of inflation of course, every day via the media mills, and if short-term inflation fears aren’t strong enough, they move onto fake forecasts of future inflation. A constant fear-mongering to keep the high rates in place. Inflation has fallen for 16 months and has hit a plateau recently. However, on January 20th, government spending will see a major reduction which could spell the end of inflation.

The Cascading Effects of Rising Rates

The impact of elevated interest rates extends far beyond simple borrowing costs, creating a complex web of challenges that threatens business sustainability and economic dynamism.

1. Reduced Consumer SpendingAs interest rates rise, borrowing costs increase for consumers. This leads to higher monthly payments on loans, such as mortgages and credit cards, reducing disposable income. Consequently, consumers tend to cut back on spending, which can slow down economic growth.
2. Putting American Business Owners Out of Business
   As seen during the Covid pandemic, a recession ends small businesses, erasing owner’s equity, life-savings, and ability to start back up again. After losing everything, or being crushed by high-interest rates, they cannot start up again. This devastates local communities which rely on small businesses for employment and local tax bases.
3. Working Capital Crisis
   Small businesses facing higher for longer borrowing costs for routine operations are experiencing severe working capital constraints. A manufacturing company that previously maintained a $500,000 line of credit at 5% now faces rates exceeding 10%, effectively doubling their financing costs. This dramatic increase forces many to choose between maintaining inventory levels and meeting payroll obligations.
4. Investment Paralysis
   Capital expenditure plans are being shelved across industries. Businesses that planned facility expansions or equipment upgrades are finding that higher financing costs make previously viable projects unprofitable. This investment freeze not only stunts individual business growth but creates a ripple effect through supply chains and local economies.
5. Employment Stagnation
   As operational costs rise due to higher interest payments, businesses are implementing hiring freezes or reducing their workforce. The restaurant industry, for instance, has seen numerous establishments scale back expansion plans that would have created new jobs, contributing to a broader slowdown in employment growth.
6. Innovation Deficit
   Higher borrowing costs are particularly devastating for startups and innovative small businesses. Many promising technologies and business models remain unexplored as the cost of capital becomes prohibitive for early-stage ventures. This creates a long-term innovation gap that could hamper economic competitiveness.
7. Real Estate Market Disruption
   Commercial real estate is experiencing significant stress as higher interest rates impact both property values and refinancing options. Small businesses that own their premises face crushing increases in mortgage payments, while those leasing space confront rising rents as property owners pass on increased costs. The residential housing market is caught as homeowners can’t refinance their home loans, nor new buyers qualify to buy homes. A weak housing market cripples towns and cities across America.
8. Local Economic Downturns
   Local economies are experiencing decreased business activity as higher interest rates reduce both business investment and consumer spending. This creates a negative feedback loop affecting everything from municipal tax revenues to community development projects.
9. Supply Chain Vulnerabilities
   Higher financing costs are straining supply chain relationships. Smaller suppliers, facing increased working capital costs, are struggling to maintain inventory levels and fulfill orders. This creates reliability issues that cascade through the entire supply chain, affecting larger businesses and end consumers.
10. Business Takeovers
    As smaller businesses struggle with higher costs, many are forced to sell at a poor price to larger competitors who have better access to capital. This consolidation reduces market competition and can lead to reduced consumer choice and higher prices. SMB owners will then be reluctant to take chances on creating another new business and may just decide to exit given the uncertainty.
11. Reduced Research and Development
    Businesses are cutting back on R&D investments as they divert resources to service higher interest payments. This reduction in innovation spending has long-term implications for productivity growth and competitive advantage.  Large corporations dive into AI systems, thus reducing their workforce costs, while small businesses can’t do the same.
12. Global Competitiveness Challenges
    American businesses, particularly in manufacturing and technology sectors, are finding it harder to compete globally as higher capital costs put them at a disadvantage compared to competitors in countries with lower interest rates. A higher US dollar (driven by high Fed rate) makes US businesses less competitive and US exports too expensive.

President Trump vs the FED

There has been talk that President Trump may attempt to defund or dissolve the FED. That makes good sense, since the FED is unresponsive to Trump’s goal of revitalizing America’s competitiveness and GDP.  The much-vaunted FED pivot hasn’t really happened.  The fact is, high interest rates could possibly derail Trump’s entire economic strategy, thus making them the number one threat to his government.

It would be difficult to replace the Federal reserve, but ending its power over interest rates is the real goal. I’m sure dissolving the FED is on the President’s agenda.

Interest rate setting has to work in favor of the US economy, regardless of short-term pain, to help the US regain its economic strength. And US small business success works for well for America’s stock market, housing market, education system, social programs and economic well-being.

In this post, I hoped to point out the relationship of deliberate high interest rate policy to economic, cultural, and social decay. If higher for longer isn’t vigorously challenged, it can erode the US equities market and too, small business survival.

Please let your governor and state representation know you won’t stand for this political ploy to undermine your well-being as a small business owner. Contact the media and get your voice heard about relaunching the Pro-America agenda.  No one else is representing your interests in Washington.

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