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Too Little, Too Late?

Only time will tell whether the Fed's interest rate cuts will help entrepreneurs.

The economic slowdown and rumors about a recession in the offing for 2001 is causing small-business advocates to voice frustration over the Federal Reserve's delay in lowering interest rates. When the flow of money slows to a trickle in the public markets and traditional borrowing rates remain high, entrepreneurs get hit first and, arguably, hardest.

The economy depends on entrepreneurial growth, so the Fed should have ample incentive to cut rates and make other pro-small-business policy changes. So says the Small Business Survival Committee, a nonprofit, non-partisan small-business advocacy group. In its latest report, SBSC chief economist Raymond Keating praises Congress' 1997 capital gains tax cut and the incentive it provided for investment in entrepreneurial ventures, but also criticizes the tightening of monetary policy in late 1999 and early 2000, calling those rate hikes "grossly misguided policy measures."

The January rate reduction was a move in the right direction, says Keating, but he adds it could hardly be called a panacea, given that Wall Street seemed wary at best. The SBSC is urging additional rate cuts, plus tax cuts and deregulation to provide pro-growth incentives. "We expect to see a quick phase-in and passage," says Keating, adding that it can take anywhere from six to 18 months for the effects of Fed policy changes to wind their way through the economy. The longer it takes, he says, the harder it will be on entrepreneurs.

"We're very glad to see the Fed reversing course," Keating says. "Our question is, Are they too late?"

That's a tricky one, agrees Todd McCracken, president of Washington, DC-based National Small Business United. "You cut rates when you see a downturn, and that's when something has actually happened, which means, almost ipso facto, you're too late," he says. But entrepreneurs have an advantage in troubled times. "Small businesses are responsive and can turn on a dime," says McCracken.

Of course, entrepreneurs should be careful with their business planning and cautious with their spending. But, McCracken adds, "If they've only been discouraged from doing something because of the cost of credit or capital, and they now see that coming down, they should jump on it."


C.J. Prince is a New York City writer who specializes in business topics and the executive editor of Chief Executive magazine.

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This article was originally published in the April 2001 print edition of Entrepreneur with the headline: Too Little, Too Late?.

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