Economists Analyze the Impact of Fed Rate Cut on Freight and Logistics Industry
By Jeff Berman
September 30, 2024
The Federal Reserve announced its long-awaited interest rate cut on September 18, reducing rates by 0.5 percentage points to a range of 4.75%-5%. This move has sparked widespread positive feedback from stakeholders in the freight and logistics industry.
As a benchmark tool for stimulating commercial activity through borrowing costs, this rate cut comes at a time when inflation is declining, especially since it peaked at 9.1% in June 2022. According to the latest data, inflation fell to 2.5% in August. Industry observers have been waiting for this cut as high inflation has had adverse effects on supply chain operations, labor, and related business activities.
Recently, Logistics Management conducted a reader survey involving over 100 freight, logistics, and supply chain stakeholders. The results showed that 63% of respondents believe the rate cut will be beneficial to the industry, while 37% do not.
The reasons given by the former include: obtaining cheaper funding can help the industry and various businesses; reducing interest payments and improving cash flow; stimulating growth in the housing sector; and enhancing consumer demand. The latter provided reasons such as labor issues being unaffected by rates and deflation, among others.
Newsroom Notes reached out to three economists for their views on the rate cut and its potential impact on freight and logistics.
Keith Prather, Managing Director of Armada Corporate Intelligence, explained that what was most surprising about the rate cut wasn’t the 50-basis-point reduction by the Fed but the follow-up expectations for further cuts throughout the year.
“The current dot plot from the Fed estimates a possibility of an additional 50-75 basis points in cuts by year-end,” he said. “We can expect a 25-basis-point cut in November, and perhaps another one in December. This would put the Fed ahead of schedule on its path to reach its long-term rate of 2.9%, expected to be achieved by early 2026.”
From a supply chain perspective, Prather noted that U.S. 10-year Treasury yields had already started declining weeks before the announcement, perhaps in anticipation of the cut, which led to lower mortgage rates and increased refinancing activity. He explained that such benefits can release discretionary funds for consumers, potentially stimulating growth in certain sectors like automotive and parts of retail.
“It will take some time for more significant impacts,” Prather said. “These initial cuts and the ‘promise’ of further potential cuts will shift many large construction projects from being shelved to actual operation. The construction industry is a double-edged sword for transportation; it does help boost demand but may also accelerate the reduction in trucking capacity (construction competes with freight for CDL drivers). This impact could have a greater effect on automotive, electronics, and other bulk commodities by early 2025. Holding costs will decrease, giving some companies more opportunities to be proactive in purchasing. Many global manufacturers are stimulating growth through discounted goods, and due to the relatively strong dollar, certain companies may have the opportunity to build up inventory. This could further increase warehousing demand as well as off-season intermodal and road transport needs.”
Paul Bingham, Global Intelligence & Analytics Director of Transportation Consulting at S&P Global Market Intelligence, concurred with Prather’s analysis, noting that a 0.5% Fed rate cut will set the stage for lower costs associated with capital and inventory holding.
Bingham added that as overall economic demand continues to weaken, the cuts should help moderate the decline in economic activity.
“Even at 0.5%, it’s just the beginning of cutting rates from a sustained peak high enough to offset inflation reaching a 40-year high in 2022,” Bingham said. “The rate cut will encourage more investment and consumer spending, leading to less economic slowdown than previously expected by 2025, with activity levels remaining favorable for freight and logistics.”
Walter Kemmsies, President of The Kemmsies Group, pointed out that since the Fed began raising rates significantly in 2022, financing long-term assets like real estate has become difficult, not only due to higher borrowing costs but also because of uncertainty about future interest rate levels.
“When the Fed started signaling no more hikes and imminent cuts, conditions in capital markets improved,” he said. “Lower rates are beneficial for transportation as they reduce the cost of purchasing large equipment like trucks. Lower rates also stimulate demand for assets such as goods and real estate. Home sales and new residential and commercial real estate tend to be higher when interest rates are lower.”
Given the experience, knowledge, and expertise of these three experts, dismissing their views on how rate cuts will impact freight and logistics seems unwise. Their initial outlook is relatively optimistic and should be seen as a positive signal for future economic growth and increased demand.
Source: Logistics Management
