Last week, the U.S. Federal Reserve unanimously raised interest rates by 25 basis points to 3.75%–4.00%. Explaining the vote, Fed chair Kevin Warsh said, “The plain fact is that inflation is too high and has been for too long. This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”
The Fed’s new projections show a median year-end policy rate of 4.1% for both 2026 and 2027, versus June projections of 3.8% and 3.6%, respectively. In other words, small business owners may face higher borrowing costs for longer than previously expected.
I asked three SMB financial experts for their insight.
Chris Ward, Head of Small Business Banking at TD Bank
The latest NFIB Small Business Optimism Index shows owners remain confident in their businesses but increasingly cautious about the broader economy. The rate increase adds pressure as they balance growth with uncertainty. Higher borrowing costs may constrain investment, expansion, and hiring amid inflation, labor challenges, and softer sales expectations. Still, owners are pursuing growth more selectively, prioritizing investments that strengthen resilience and long-term value.
Ben Johnston, COO of Kapitus, a Small Business Lender & Marketplace
Prior to the Fed’s decision, small businesses were already grappling with elevated inflation rates, a volatile tariff strategy, slowing job creation, and a spike in oil and gas prices. This 25-bps increase is an attempt to rein in inflation, which has remained stubbornly above the Fed’s target of 2%, without increasing the unemployment rate, which has remained stable at just above 4%.
This rate increase, and the expectation that another increase is likely before the end of 2026, will push financing costs higher for small businesses, which have already been grappling with higher prices and supply chain uncertainty for several years. Relatively speaking, however, the small size of this increase should have less impact than rising fuel costs and tariffs. But if rates continue to rise throughout 2027, small businesses will feel a significant impact.
The businesses most affected by this change will be those that borrow money to finance their daily activities, including manufacturers, wholesalers, and retailers who use factoring products to finance the purchase of inventory and raw materials. It also includes farmers who borrow at the beginning of the season to buy seed, fertilizer, and equipment, as well as contractors who borrow to start a job, hire a crew, and buy raw materials. It also impacts any business that needs to finance new equipment, purchase real estate, or finance the acquisition of a competitor.
Small businesses operating in this challenging environment should closely monitor operating margins and avoid starting new projects until they can determine whether sufficient demand exists to justify the investment of time and capital. It is important to understand that consumers are also being squeezed in this inflationary environment.
Small business owners may want to adjust product offerings to provide lower-cost and greater-value offerings. Small business owners should ensure they have financing options lined up in case they need capital to weather a drop in demand or capitalize on an opportunity.
Dean Lyulkin, Founder of The Dean’s List, a Registered Investment Advisory Firm
I thought the Fed would frame this as a one-off insurance hike against an energy shock. We are less convinced this is now the Fed’s base case. The Fed now sees the policy rate at 4.1% at year-end, up from 3.8% in June. That implies another quarter-point hike. The worrying part is the median remaining at 4.1% through the end of 2027. The cuts that were previously expected next year are gone.
Another hike this year, followed by cooling energy prices and inflation, would still look like a short insurance-tightening. Warsh said he would be “hard pressed” to describe financial conditions as restrictive. The unanimous 12–0 vote is also important.
Investors should mind the Treasury market, not just backward-looking inflation reports. If long rates stay elevated or keep rising while growth and employment remain resilient, the Fed has more room to keep policy tight or hike again.
Photo courtesy The Federal Reserve
