Tuesday, December 15, 2009

Fed’s Interest Rate Policy Not Helping Small Business

The Federal Reserve’s interest rate policy is actually making it more difficult for small businesses to obtain bank loans. While the Fed has lowered their funds rate to 0% - 0.25% ostensibly to stimulate loans and kick start the sagging economy, the funds have not found their way to the Mainstreet economy. The reason is quite simple. Banks can borrow from the Fed at these record low rates of interest and then purchase U.S. Treasury bills and bonds which carry no risk of default. At this time, the spread between bank’s borrowing cost and the yield on the 10-year U.S. Treasury bond is roughly 3.4%. With the prime interest rate (the rate charged to most credit worthy customers) now at 3.25%, it makes little sense for banks to lend to businesses incurring greater risk and adding little to their bottom line. Ernie Goss

1 comment:

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