Federal Reserve & Interest Rates

Federal Reserve Board Governor Mishkin gave a testimony this morning about the availability of credit to small businesses.  Apparently, things are not looking very good.  The economy as a whole has been gradually improving, according to the Governor, however, he warns that there could be a possible negative turn ahead for those seeking small business loans.

Generally, as for just about any borrower are this time, credit is very likely to be less available and more expensive for small business owners.  It is logical to suspect, since recent actions have been taken to prevent credit crunch, loan seekers may have a difficult time obtaining funds.

This is not a definite prediction.  Governor Mishkin phrased it like this: “I emphasize that the possible effects are complex, that we do not yet have much hard evidence, and that it is far too early to draw any definitive conclusions. Thus, my comments should be viewed as preliminary and subject to an unusually high degree of uncertainty.”

Evidence suggests that financial market disruptions may negatively affect the availability of credit to small businesses.  At this time, it is not likely that the market performance will have “a large direct effect on small business lending.”  Survey data suggests that, overall, the market for small business credit has tightened.

Other data related to business lending with smaller banks seems encouraging.  Mishkin stated, “such loans have continued to expand at a fairly robust pace through mid-October.”  Larger banks, since they are more directly impacted by loan securitization markets, would be much morel likely to experience problems in lending ability.  The direct effect on small business owners would be fairly limited.

One additional aspect that the Governor did mention was the fact that many small businesses use personal real estate assets to secure their loans.  It is no secret that the struggling market has taken a toll on property values.  This direct connection to what is currently the weakest investment market is a cause for concern that business owners should consider.

Governor Mishkin stresses that, “at least for now, the effects have generally been quite limited.”  There is continued uncertainty with this situation, as with our economic outlook as a whole.  The Federal Reserve is, as usual, keeping a close eye for problems that could arise.