As Fed eyes hike, businesses cry ‘Uncle!’

The Federal Reserve is ready to turn up its funds rate another 0.75 point while a survey showed that small businesses are already struggling and are not ready for the recession that they see coming in the next six months.

The Fed is expected to raise its key interest rate to the 4% range on Nov. 2 in the latest of the fastest rate increases in decades to fight an inflation has been stubbornly high for several months. Even though Fed Chair Jerome Powell has said he is aiming for a soft landing for the economy, the central bank has been cranking up rates in greater increments than it has since 1980s, the last time the United States faced such high inflation.

The November increase would be the fourth 0.75% consecutive boost, even though the bank hasn’t raised the rate by 0.75% since 1994. The Fed has signaled it would consider a smaller rate increase in December.

Some critics, such as former Treasury Secretary Larry Summers, said the Fed was too slow to react to inflation last year and is now too aggressive in trying to pull it down. Even the United Nations rang the alarm before the last rate increase, warning that the Fed was pushing the world into recession.

The Fed’s aim is to slow the economy, and a recent Nationwide Agency Forward survey showed that small businesses are already feeling it. The poll showed that 70% of small business owners expect a recession in the next six months. But most owners are not prepared for it, with only 37% saying they are ready to ride out a recession, the same percentage of consumers who say they are prepared.

Inflation is the business owners’ top concern (61%), while supply chain disruptions still are vexing businesses, with 41% saying it is a problem. The third top concern was rising interest rates at 35%.

Only 42% of business owners said that business conditions were good and 9% said they were excellent; 34% said conditions were fair and 14% said they were poor. Four in 10 owners (39%) said revenue dropped somewhat or a lot over the past six months, with only 3% saying it increased a lot; only 34% expect an increase of any kind in the next six months.

Cutting jobs

The survey showed that small business owners have been responding to the slowing already, with 58% having looked for ways to reduce expenses in the past months and another 24% looking to do so in the next six months. They have already dipped into their own savings, with 38% saying they have done so, with another 16% expecting to dip into their own money.

Although government data shows a persistently strong demand for labor, the business owners have already slowed employment, with 26% saying they have paused hiring and 12% saying they will in the next six months. Another 23% have or plan to furlough workers or reduce hours.

Perhaps most alarming to Nationwide, 51% of the owners said they are likely to decrease their insurance coverage or limits to reduce expenses if there is a recession. Eric Coleman, Nationwide senior vice president of small business insurance, said owners will be putting their business at long-term risk with the short-term strategy of reducing coverage. Worse still, owners have not been talking to their agents about it.

“With so many small business owners considering changes to their insurance, it is startling that only 29% of owners have connected with their agent to discuss their policies, especially as inflation and supply chain issues continue to drive up repair costs and timelines,” Coleman said. “In those conversations, business owners should ask about and consider how lack of coverage or appropriate limits could impact their operations in the future. Making decisions and updates without speaking to an agent could counter cost-saving attempts.”

In the meantime, financial markets were cheered on Friday both that the Fed plans to increase rates and that the bank is expected to reduce those increases in the future, with even some Fed officials wanting to slow the bank’s roll.

San Francisco Fed President Mary Daly said on Friday that it was time to talk about smaller rate hikes, saying that the central bank is moving into a second phase that should be “thoughtful” and “incredibly data-dependent,” according to a Reuters report of a speech Daly gave.

“We have to make sure we are doing everything in our power not to overtighten,” Daly said, adding, “and we can't pull up too fast, and say we are done.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at stevenamorelli@gmail.com.

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Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at steve@innemail.com.