Thanks in large part to small businesses and their hiring efforts this year, unemployment has ratcheted down to 5.1 percent from 5.3 percent the previous month, according to the August jobs report from the Department of Labor, released Friday morning.
In fact, the economy added 173,000 new jobs during the month. While that’s a bit lower than labor experts had forecast, it's really good news for the economy.
Now here's the bad news: A lower unemployment rate and continued signs of strong hiring are two critical metrics that are likely to make the Federal Reserve Board elect to increase interest rates at its September 16 meeting. The central bank would adjust its federal funds rate, which has remained at 0 percent for the last 8 years, essentially since the financial crisis began.
Banks use that rate to set their own prime rate, which is used to calculate interest rates on commercial loans, credit cards, and credit lines, all of which are critical to small businesses in financing their operations.
"Small businesses rely on access to inexpensive capital for acquisition and growth," says David Nilssen, chief exective of small business finance company Guidant Financial. "Our hope is that [Federal Reserve Chairwoman] Janet Yellen will wait a bit longer to understand how China's economic issues will affect the U.S., and allow some of the volatility to shake out of the market."
It's been a matter of heated debate when the central bank will raise its own key rate again. This is the longest period, perhaps in the history of the Fed, with a rate this low, and financial and policy experts fear damage to the economy, including hyper-inflation or a deflationary debt spiral, if rates don’t go up soon.
Most economists agree, however, that a rate increase, whether it happens this month or not until the Fed’s meeting in December, will be small, on the order of 0.25 percent.
Peter Fisher, a senior fellow at the Center for Global Business and Government at Dartmouth University’s Tuck School, puts the chances of a rate increase this month at about 50 percent. Still, he says, the exact timing isn't the primary issue.
“Chairman [Janet] Yellen has made it very clear--and Federal Reserve Vice Chairman Stanley Fischer repeated it--the start of [a rate increase] is much less important than the pace at which they are expected to raise rates,” Fisher says.
Ultimately the federal funds rate will be increased to a more historic norm, somewhere around 4 percent, economists say.
Another metric the Fed is monitoring carefully is inflation, which is currently at about 1.5 percent. That’s lower than the 2 percent inflation rate central bankers have said they’d like to see before hiking the federal funds rate, because that rate indicates an adequate level of demand in the economy.
Small businesses, of course, have been driving much of the job growth in the past year. In August, small private companies added 85,000 jobs, according to payroll processor ADP’s small business report.
The economy has added an average of 200,000 jobs per month since the beginning of 2014, the The New York Times reports.