The Fed announced that it has reduced the rate it charges banks, the ?Fed Funds Rate,? by half a point (0.5%) to two percent (2%). If you don?t remember the last time this occurred, you?re not alone: The last time the rate was this low was 40 years ago! ?So what?? you say. Actually, the repercussions of this action are sizable, even for the average small business owner.

The most obvious and tangible change will be to the short term interest rates you pay on all loans. This is important for any of your business loans, most of which have a floating interest rate, which is adjusted usually monthly or quarterly. On a $100,000 loan, this is a $500 annual savings!

The more sizable effects are less obvious. The Fed, by lowering their rate for the 10th time this year is saying that they think the economy is worse than they thought. The Fed usually adjusts interest rates up or down based on their presumption of the growth of the economy and inflation. If the economy is too strong and there is a fear of inflation, then they will often raise rates. Higher rates make loans more expensive, making businesses less likely to borrow to expand, thus slowing down the economy.

If the economy is slowing (AKA recession), the Fed will often lower interest rates to stimulate growth. Borrowing is less expensive and therefore companies will be more likely to borrow to expand their businesses.

This rate reduction is further proof in the belief that the recession will continue. ?Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity,? the Fed said in a statement. Many expect the Fed to continue cuts further.

The proof is in the numbers: Unemployment is up to a five-year high of 5.4% and manufacturing is falling at its fastest pace since the 1990-91 recession. The only positive numbers are from the stock markets, which reached their highest levels since the September 11th attacks.

If these cuts do as expected, then there should be an enormous growth in buying activity. More homes will be sold because of lower mortgages. Businesses will start to consider the expansion that was tabled after 9/11. Consumers will buy more because of lower mortgage & potentially lower credit card rates. This means more business to you, the small business owner.