Federal Reserve Chair Jerome Powell gives a press briefing after the surprise announcement the FED … [+]
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With stocks in a tailspin, the Federal Reserve moved to cut the Federal Funds interest rates by 50 basis points on Tuesday, March 3, to make the target between 1.0% and 1.25%.
At a Washington press conference, Federal Reserve Chair Jerome Powell announced that the central bank would slash interest rates in an emergency move to soften the economic blow that has come from fears of the Coronavirus. It’s the biggest cut in memory and the first time the Fed has made an emergency interest rate cut since 2008.
“My colleagues and I took this action to help the US economy keep strong in the face of new risks to the economic outlook,” Powell said, obviously referring to the impact the spread of Coronavirus has had on the world economy.
At the same time, he stated that the fundamentals of the U.S. economy remain strong, the unemployment rate remains at half-century lows, the pace of job gains has been solid, and wages have been rising.
When asked if he could envision raising rates if the economic damage isn’t as bad as currently feared, Powell responded that the Fed is “always going to set monetary policy at a given time in a way that we think best serves our dual mandate goals.”
Powell said he doesn’t know how long the Federal Funds rate will remain so low, but he believes the U.S. economy remains strong.
“We will get to the other side of this and I fully expect that we’ll return to solid growth and a solid labor market as well,” Powell said.
At the same time, the Fed Chair said he realizes that an interest rate cut cannot reduce the rate of infection and won’t fix a broken supply chain.
“We get that — we don’t think we have all the answers,” he admitted.
Right now, certain sectors of the economy are hurting, perhaps none more than the travel business. Cruise industry stocks have sunk, thanks to the Coronavirus. Carnival Cruises’ total return for 2020 is -33.4%, while Royal Caribbean is at -39.8%. Airline stocks have crashed this week. United Airlines continues to cut flights to Italy and Asia and has seen its price drop dramatically. On Feb 20, its price was at $80, on March 2, it was $57.96. Since mid-February, American Airlines stock has lost almost half of its value, and Delta’s stock is down nearly 25%.
Related industries are struggling. Hotel rooms are being cancelled both abroad and domestically. This impacts the big chains, as well as boutique hotels run by small business owners. Restaurants have seen revenues drop as people “self-quarantine” until the Coronavirus threat subsides. If companies begin allowing employees to work from home, restaurants that serve office workers will struggle as their customer base stays away.
Retailers are hurt because inventory from China has not been entering the country. Manufacturers have been impacted because they’re not getting raw materials, and if they employ Chinese factory workers who went back to China for Chinese New Year, these company may be short on labor.
A big problem for small businesses when disaster hits is that many of them do not have working capital for more than 1 month of operations. For such companies, they may need to find sources of cash.
What should small business owners do?
1) Apply for a small business loan
Interest rates are nearly as low as they can possibly get. The Coronavirus could be just a short-term scare, like the SARS virus a few years ago. Taking out a small business loan at a good rate can help cover capital expenses if business is down. Additionally, if you have had solid financials for the past couple of years and are considering a loan for expansion, you now have the opportunity to secure funding at a very low cost of capital.
2) Open a business line of credit
Maybe you don’t need to take out a big amount and pay interest, getting a small business line of credit might be the right solution for your firm. A line of credit is available for times of need, and you only pay interest on the money if you dip into the account.
3) Consider a merchant cash advance for quick funding
If you need money quickly because of a dramatic drop in revenues related to the Coronavirus scare, a merchant cash advance can help bridge the gap during a cash crunch. The funding comes at a higher cost of capital than traditional bank loans, but in a cash crunch, speed may be more important than the cost of capital. A merchant cash advance can be a lifeline for a successful business that might be going through a short-term cash flow issue.
4) Continue marketing your business
It’s critically important to market your firm during tough times. While it may be tempting to cut your advertising budget if you own a restaurant whose sales are down because of the Coronavirus fallout, it’s important to keep top-of-mind and remind customers your business is still there. The messaging can involve reminding the public of your (presumably positive) food safety and training record and reinforcing the measures the kitchen is taking to prevent the spread of disease.
Hopefully, the Coronavirus impact will be short-lived and containment and an antidote will help life return to normal. Meanwhile, utilize marketing tools: advertising, publicity, and social media to keep your customers thinking about you and wanting to keep coming back – especially if they get out of the habit of visiting you during this scare.