Small business optimism sours on Fed rate cut

WASHINGTON (Reuters) - Optimism about the U.S. economy among small businesses soured last month as a Federal Reserve interest cut intended to aid the economy instead triggered cutbacks in spending and hiring, a survey released on Tuesday showed.

The index of small business optimism slipped 1.1 points to 96.2 in October following the September 18 interest rate cut, The National Federation of Independent Business said.

"Dr. Bernanke gave us a flu shot, and now we got it," said William Dunkelberg, NFIB's chief economist. "Now we are showing symptoms, cutting our spending, cutting our hiring and it's supposed to keep us from doing that."

In September, the Federal Reserve cut the benchmark federal funds rate -- the Fed's main tool for influencing the economy -- to 4.75 percent, the first cut since June 2003. The Fed again cut the benchmark federal funds rate at the end of October.

The second rate cut was too late to affect this survey, Dunkelberg said, adding that he does not expect the second cut to have nearly the impact of the first cut.

"The Fed may be preoccupied with recession, but small-business owners' reports of price hikes suggest that inflation can't be dismissed," he said.

"The historic relationship between inflation and the percent of owners reporting higher prices suggests that inflation will be showing some new, unwanted vitality," Dunkelberg said.

Over the next three months, a seasonally adjusted net 11 percent of owners plan to create new jobs in October -- down three percentage points from September, NFIB said.

Small business plans to make capital expenditures over the next few months lost two percentage points, falling to 27 percent of all firms, NFIB said.

Just 14 percent of the owners expressed the view that the current period is a good time to expand facilities, unchanged from September.

"The reason we got depressed is that (Federal Reserve Chairman Ben) Bernanke said that the economy is slowing dramatically and there is a risk, so if you are telling I am going to have fewer customers and so on, I'm going to scale back and become a little more cautious, which we did," Dunkelberg said.

(Reporting by Nancy Waitz; Editing by Jonathan Oatis)