Fed cuts to bond buys are good news for small businesses: PayNet

Tue Sep 17, 2013 5:01am EDT

(Reuters) - Worries that a reduction in the Federal Reserve's giant bond-buying program will chill investment at small U.S. businesses are misplaced, according to research from Chicago-based PayNet, which tracks borrowing by small firms.

Instead, firms are likely to interpret any Fed move to pare its $85-billion-a-month bond-buying stimulus as a positive referendum on the economic outlook, PayNet said in a report released on Tuesday.

Their reaction, based on an analysis of the historical relationship between rate increases and business borrowing, is likely to be to boost investment and, eventually, hiring, PayNet said.

Fed policymakers open a two-day meeting Tuesday at which they are widely expected to begin a process of paring the bond-buying program and ending it by mid-2014.

"Tapering is an ultimate positive for the small business economy in the long run as rising rates signal a robust economy," PayNet said in the report.

Fed policymakers do not expect to raise rates until at least six months to a year after they end the bond-buying program. Still, a first taper will signal that the Fed will eventually end an unprecedented era of low borrowing costs.

The Fed has kept its target for overnight bank-to-bank lending rates at near zero since December 2008 in order to pull the economy from its deepest downturn in decades.

"Everybody thinks that higher rates are going to slow the economy," PayNet President Bill Phelan said in an interview. "But rising rates really mean more borrowing. That's because growth is occurring in the economy."

PayNet studied Treasury yields and small business borrowing from 2005 to 2013, and found that rate rises were highly correlated with increases in borrowing.

That's not, of course, because higher rates are stimulative in themselves. As rates rise, so do borrowing costs, and a steep and sudden increase can squelch incentives to borrow.

But moderate rate rises often come in tandem with economic growth, and as long as businesses see rising demand and continuing growth ahead, slightly higher borrowing costs won't deter them from increasing investment, Phelan said.

Hiring will then likely follow, PayNet data suggests. Hiring generally lags borrowing by about nine months, the data shows.

Small U.S. businesses took on more debt in July, pushing an index of borrowing to its highest level since August 2007.

PayNet collects real-time loan information such as originations and delinquencies from more than 250 leading U.S. lenders.

(Reporting by Ann Saphir; Editing by Andrea Ricci)

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