I just finished reading a post by the Cato Institute’s Steve H. Hanke where Mr. Hanke argues that the Federal Reserve’s target of zero to one quarter of a percent federal funds rate is actually exacerbating the credit crunch still faced today by small and medium sized businesses. The federal funds rate is the rate banks charge each other for overnight loans. A bank may have some excess funds in their reserve accounts and lending out money to another bank helps bring in additional interest revenue.
At least that is how it was before the Federal Reserve embarked on its in-the-cellar federal funds rate policy. At rates scraping the bottom of the pond, banks find themselves in the federal funds rate trap where they have no incentive to lend their reserves overnight (There is no altruism in lending). If banks aren’t lending each other money, this means there are fewer funds available for a bank in need to lend to its customers, specifically small and medium sized business customers.
This is where the impact on minority and woman owned businesses come in. Almost no minority-owned businesses are publicly traded on Wall Street so access to equity financing does not exist. These firms have to go to the banks, but with the Federal Reserve refusing to start the ripple effect of lending by increasing its federal funds rate, minority-owned firms are foreclosed from an opportunity to access credit.
You may ask why would minority-owned firms want to borrow at an increased rate and my answer is they may not want to unless they are confident they will experience the returns to be profitable while paying back the loan. The market, specifically investors, want to see a money pricing system that reflects the risk involved in lending to smaller businesses that may also be low on collateral or other assets. A zero rate simply does not do that.