The Fed raised rates for the first time since 2023. What a quarter point means for small business borrowing

The Federal Reserve raised its benchmark interest rate on September 16 for the first time since 2023, lifting the target range for the federal funds rate by a quarter of a percentage point to 3.75% to 4%. The Federal Open Market Committee approved the decision unanimously, 12 to 0, at the end of a two-day meeting. It was the first rate increase under Chair Kevin Warsh.

The move had been widely expected. Market prices had shifted toward a hike in the weeks before the meeting, and Treasury yields initially moved lower after the announcement, a sign that the decision itself held little surprise. The more consequential signal was in officials’ projections: most expect to raise rates again before the end of the year.

How the Fed got here

The committee had held its target range at 3.50% to 3.75% since December 2025. At its July 2026 meeting it kept the range unchanged by a 9 to 3 vote, with all three dissenters favoring an increase. That split foreshadowed September.

At his press conference, Warsh pointed to inflation. “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved,” he said, according to the Federal Reserve’s transcript. Coverage of the meeting also cited a resilient job market, including a strong August jobs report, and rising oil prices as factors behind the decision.

Officials’ assessment of risks shifted as well. According to reporting on the projections, almost all participants judged that inflation risks remained tilted to the upside while risks to the labor market had diminished and were broadly balanced. That combination is the classic setup for tighter policy.

The decision also reverses the direction of recent policy. The last time the Fed raised rates, in 2023, it was ending a run of increases that began in 2022 to fight high inflation. It then cut rates in 2024 and 2025 before holding at 3.50% to 3.75% from December 2025. September’s increase is the first sign since then that officials see inflation, rather than a weakening job market, as the bigger risk.

What the Fed actually changed

The federal funds rate is the rate banks charge one another for overnight loans of reserves. The Fed does not set it directly; it steers it with tools such as the interest rate it pays banks on reserve balances. Alongside the decision, the Fed’s Board of Governors raised that rate to 3.90%, effective September 17.

Most borrowers never pay the federal funds rate. They pay rates set by lenders that move with it to varying degrees, which is why the effects of a quarter-point change spread unevenly.

How it reaches a business

Variable-rate credit lines and loans. Many business lines of credit and variable-rate term loans are priced as a margin over the prime rate, and banks typically adjust their prime rate in step with changes in the Fed’s target. That means the cost of borrowing on these products tends to rise within days. On a $100,000 balance, a quarter point adds roughly $250 a year in interest, before any additional increases.

SBA loans. Many SBA 7(a) loans carry variable rates pegged to the prime rate, so the same effect applies. Borrowers should check their loan agreements for how often the rate resets.

Business credit cards. Card rates are usually variable and tied to prime as well. The change is small relative to typical card rates, but it compounds on balances carried month to month.

Fixed-rate loans. Existing fixed-rate debt does not change. New fixed-rate loans, including equipment financing and commercial mortgages, are priced off longer-term market rates, which reflect expectations about future Fed moves as much as today’s decision.

Cash. The other side of the ledger improves. Yields on money market funds, Treasury bills and some business savings accounts tend to follow the federal funds rate upward, so businesses holding reserves earn somewhat more.

What to watch before October 28

The committee’s next decision is scheduled for October 28. Between now and then, the inflation and employment reports for September will shape whether officials follow through on the additional increase most of them projected.

The minutes of the September meeting, which the Fed published three weeks after the decision, give more detail on how officials weighed the risks. They are worth reading for one question in particular: how much of the case for tightening rests on energy prices, which can reverse quickly, versus broader price pressures that tend to persist.

Practical steps for owners

• Find your variable exposure. List every loan, line and card with a variable rate and note what it is tied to and how often it resets.
• Run the numbers on two more hikes. Budgeting for half a point of additional cost is a reasonable stress test given the Fed’s signal, even if it does not happen.
• Consider timing on planned borrowing. If a fixed-rate loan for equipment or property is already planned, talk to lenders about rate locks. Long-term rates can move before the Fed does.
• Revisit idle cash. Balances sitting in non-interest accounts are worth more in a higher-rate environment.
• Price with care. Higher borrowing costs affect customers too. Businesses that rely on customers financing large purchases may see demand soften first.

The Fed’s statement, the chair’s press conference transcript and the meeting minutes are all published on the Federal Reserve’s website and are the authoritative record of what the committee decided and why.