How the Fed Funds Rate Affects Your Loan

How the Fed Funds Rate Affects Your Commercial Loan

Every commercial loan rate in America traces back, directly or indirectly, to one number: the federal funds rate. When the Federal Reserve raises or lowers this rate, the effects ripple through every benchmark, every loan product, and ultimately every monthly payment you make. Understanding this chain -- and where your specific loan sits in it -- is the difference between reacting to rate changes and planning for them.

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What Is the Federal Funds Rate?

The federal funds rate is the interest rate at which banks lend their excess reserves to each other overnight. It is set by the Federal Open Market Committee (FOMC) at its meetings, typically eight times per year.

Current federal funds rate: 3.50% - 3.75% (as of May 2026)

The Fed does not directly set your loan rate. Instead, it sets the target range for the fed funds rate, and market forces translate that into the benchmarks your loan is priced from.

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The Rate Chain: From Fed Funds to Your Payment

Here is how the federal funds rate flows through to the rate on your commercial loan:

Federal Funds Rate (3.50-3.75%)

-> Prime Rate (6.75%) = Fed Funds upper bound + 3.00%

-> Your SBA 7(a) Rate = Prime + lender spread (2.25-6.25%)

Federal Funds Rate (3.50-3.75%)

-> SOFR (~3.66%) = closely tracks fed funds

-> Your variable-rate loan = SOFR + lender spread

Federal Funds Rate (indirect influence)

-> 10-Year Treasury (~4.42%) = influenced by inflation expectations, not just fed funds

-> Your fixed-rate loan / SBA 504 = Treasury + lender spread

The key insight: variable-rate loans track fed funds almost dollar-for-dollar. Fixed-rate loans do not. The 10-year Treasury is influenced by many factors beyond fed funds -- inflation expectations, global demand for U.S. debt, and economic growth forecasts all play a role.

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Key Benchmarks and How They Connect

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How Rate Changes Affect Different Loan Structures

Variable-Rate Loans (SBA 7(a), most bank lines of credit)

Variable-rate loans are the most directly affected by Fed decisions. When the Fed cuts by 25 basis points:

• Prime drops by 25bp (e.g., 6.75% to 6.50%)
• Your SBA 7(a) rate drops by 25bp on the next adjustment date (quarterly for most SBA loans)
• Monthly payment decreases on the next reset

Example: On a $500,000 SBA 7(a) loan at Prime + 2.75% (currently 9.50%), a 25bp Fed cut would lower your rate to 9.25%, saving approximately $1,250 per year in interest ($104/month).

Variable-rate borrowers benefit immediately from Fed cuts but are exposed to increases. This is the trade-off.

Fixed-Rate Loans (SBA 504, conventional fixed, CMBS)

Fixed-rate loans do not change when the Fed moves. Your rate is locked for the loan term. However, the Fed influences fixed rates indirectly:

• When the market expects the Fed to cut, the 10-year Treasury often drops in anticipation, which lowers fixed rates for new loans
• When the market expects the Fed to hold or raise, the 10-year Treasury may rise, which increases fixed rates for new loans

Key distinction: Fed rate changes affect the rates available on new fixed-rate loans. They do not affect your existing fixed-rate loan.

SBA 504 (Fixed CDC Portion + Variable Bank Portion)

SBA 504 is a hybrid. The CDC portion (40% of the project) carries a fixed rate tied to the 10-year Treasury at the time of debenture sale. The bank portion (50% of the project) can be fixed or variable at the bank's discretion.

A Fed cut:

• Does not change your existing CDC fixed rate
• May lower the bank portion if it is variable
• May lower the fixed rate available on new 504 loans (if the Treasury drops in response)

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Historical Rate Impact: September 2024 - December 2025

The most recent rate cycle provides a concrete illustration of how Fed actions flow through to commercial loan rates:

The result: From the September 2024 peak to today, variable-rate commercial borrowers have seen their rates drop by approximately 175 basis points -- saving roughly $17,500 per year per $1 million in variable-rate debt.

Fixed rates (10-year Treasury) moved less dramatically during this period, dropping from ~4.60% to ~4.42%, because Treasury yields were already pricing in anticipated cuts before they happened.

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The Fed's Current Stance: What You Need to Know

At its most recent meeting (April 29-30, 2026), the FOMC voted 8-2 to hold the federal funds rate at 3.50-3.75%. Key points from the statement and press conference:

• Inflation remains above target. Core PCE is running around 2.6-2.8%, above the Fed's 2% goal. The committee cited persistent services inflation and uncertainty around tariff impacts.
• The labor market is healthy. Unemployment remains low, which gives the Fed cover to be patient.
• The two dissents came from members who favored a 25bp cut, arguing that inflation is trending in the right direction and that holding too long risks unnecessary economic drag.
• Forward guidance: The Fed is data-dependent and will evaluate incoming inflation and employment data before making further moves. Market pricing suggests one 25bp cut in Q4 2026 if inflation cooperates.

What this means for borrowers: The rate environment is stable for now. Variable-rate borrowers should not expect further relief in the near term. Fixed-rate borrowers shopping for new loans are operating in a relatively predictable window.

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What Borrowers Should Do When Rates Change

When the Fed Cuts Rates

1. Review your variable-rate loans. Confirm the rate adjustment flows through on schedule. Some loans have rate floors that prevent your rate from dropping below a certain level.
2. Evaluate refinancing fixed-rate debt. If you locked a fixed rate when rates were higher (2023-2024), a refi into today's lower rates may save significant money -- but watch for prepayment penalties.
3. Consider locking a rate on new deals. If you are in the market for a new loan, a rate cut environment is a good time to lock a fixed rate before the market adjusts.

When the Fed Holds

1. Focus on the spread. If the benchmark is not moving, your best leverage is negotiating the lender's spread. Shop multiple lenders.
2. Strengthen your profile. Improve DSCR, pay down existing debt, and shore up documentation. A better borrower profile gets a tighter spread even in a flat-rate environment.
3. Do not wait for perfection. If your deal works at today's rates, execute it. Waiting for a cut that may not materialize costs you opportunity.

When the Fed Raises (Not Current, But Be Prepared)

1. Stress-test your variable-rate exposure. Can your business service debt at 100-200bp higher? If not, consider refinancing into a fixed rate while rates are still reasonable.
2. Lock fixed rates early. Rising rate environments make rate locks more valuable. Pay the lock fee.
3. Build cash reserves. Higher rates mean higher payments. Ensure your business has adequate cash cushion.

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Key Takeaways

1. The fed funds rate is currently 3.50-3.75%, down 175bp from the 2024 peak. Variable-rate borrowers have already benefited significantly.
2. Variable-rate loans move in lockstep with Fed actions. A 25bp cut = 25bp lower on your next adjustment date.
3. Fixed-rate loans do not change with Fed moves, but rates on new fixed-rate loans may shift as the Treasury market reacts.
4. The Fed is on pause and likely to hold through Q3 2026. One cut in Q4 is the consensus, but not guaranteed.
5. Your negotiating leverage is the spread, not the benchmark. Shop lenders aggressively.
6. Do not wait for rate perfection. Rates are 175bp lower than 2024. If your deal works today, move.

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Frequently Asked Questions

1. If the Fed cuts rates, does my existing loan rate automatically go down?

Only if your loan is variable-rate. Variable loans tied to Prime or SOFR will adjust on their next reset date (monthly or quarterly, depending on your loan terms). Fixed-rate loans do not change.

2. How quickly does a Fed rate change affect my loan payment?

For SBA 7(a) loans, rate adjustments happen quarterly (on the first business day of January, April, July, and October). For SOFR-based loans, adjustments may happen monthly. Check your loan agreement for your specific reset schedule.

3. What is the difference between Prime and SOFR?

Prime Rate (currently 6.75%) is set by banks and moves in lockstep with the fed funds rate. SOFR (~3.66%) is a market-based rate reflecting actual overnight Treasury repo transactions. SOFR is lower than Prime but lender spreads on SOFR-based loans tend to be higher, so your all-in rate may be similar. SOFR replaced LIBOR as the standard benchmark in 2023.

4. Should I choose a variable or fixed-rate loan right now?

If you believe rates will continue to drop, variable lets you benefit from each cut. If you want payment certainty and protection against potential rate increases, fixed locks in today's rate. See our guide on fixed vs. variable rate loans for a detailed comparison framework.

5. Does the Fed control my SBA 504 rate?

Indirectly. The SBA 504 CDC debenture rate is tied to the 10-year Treasury, not the fed funds rate. The Treasury yield is influenced by inflation expectations, which the Fed affects through its rate decisions and forward guidance, but the connection is indirect. The 10-year Treasury can move independently of Fed action.

6. How many more rate cuts are expected in 2026?

As of May 2026, market pricing suggests one 25bp cut in Q4 2026, bringing the fed funds rate to 3.25-3.50%. However, this is contingent on inflation continuing to decline. If inflation re-accelerates (due to tariffs or other factors), the Fed may hold at current levels through year-end.

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Check the latest benchmark rates and loan pricing on our rates page. For a detailed comparison of fixed vs. variable loan structures, read our guide: Fixed vs. Variable Rate: How to Choose.