Economists Evaluate the Impact of Fed Rate Cut on Freight Transportation and Logistics

By Jeff Berman September 30, 2024

In response to the long-awaited rate cut announced by the Federal Reserve on September 18, reducing rates from 5% to 4.75%, stakeholders in freight transportation and logistics have expressed a largely positive reaction.

As a benchmark tool that can incentivize business activity through borrowing costs, this rate cut comes at a time when inflation is declining, especially since it reached 9.1% in June 2022. In the latest data provided for August, the inflation rate has dropped to 2.5%. Industry observers had already anticipated this cut as high inflation had been adversely affecting supply chain operations, labor, and related business activities.

A recent _Logistics Management_ reader survey revealed that among over a hundred freight transportation, logistics, and supply chain stakeholders, 63% believed the rate cut would be beneficial, while 37% did not.

The rationale for supporting the rate cut includes obtaining cheaper capital to aid the industry and various businesses; reducing interest payments and improving cash flow; stimulating growth in the housing market; and increasing consumer demand. Arguments against the rate cut include that labor issues are unrelated to 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 transportation and logistics.

Keith Prather, Managing Director of Armada Corporate Intelligence, explained that what was most surprising about this rate cut was not the 50 basis points reduction by the Fed but the expectations for subsequent cuts in the remainder of the year.

“The Fed’s dot plot now estimates another 50 to 75 basis points of cuts from here until the end of the year,” he said. “We expect a quarter-point cut in November and perhaps one more in December. This will put the Fed on track for its long-term rate target of 2.9%, reaching it by early 2026.”

From a supply chain perspective, Prather noted that U.S. 10-year Treasury yields had been declining weeks before the cut, anticipating the move and also lowering mortgage rates, which spurred refinancing activity. He explained that this would free up disposable income for consumers, driving growth in sectors like automotive and retail.

“For more significant impacts, it will take some time,” Prather said. “These initial cuts and subsequent promises of further cuts will restart many large construction projects. The construction industry is a double-edged sword for transportation; while it certainly helps boost demand, it may also accelerate the reduction in trucking capacity (construction is the top competitor for CDL drivers). This effect might be more pronounced for other bulky goods like vehicles and electronics by 2025. Holding costs will decrease, prompting some companies to make opportunistic purchases. With many manufacturers worldwide discounting products to stimulate growth and a strong dollar, some companies may have opportunities to stockpile. This could lead to increased warehousing demand, irregular intermodal and trucking needs.”

Paul Bingham, Global Intelligence & Analytics Director at S&P Global Market Intelligence, concurred with Prather’s analysis from Armada, noting that a 0.5% reduction by the Fed in rates will open up a path to reduce capital costs and inventory holding costs related to supply chains and freight.

Bingham added that as overall economic demand continues to weaken from its pace at the beginning of 2024, this rate cut should help moderate the decline in economic activity.

“Even with just a 0.5% cut, this is the start of a descent from its sustained peak, sufficient to offset inflation hitting a 40-year high in 2022,” Bingham said. “These cuts will encourage more investment and consumer spending compared to no cuts, leading to a less severe economic slowdown in 2025 than previously expected, with activity levels supporting demand for freight and logistics.”

Dr. 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 became more difficult. He noted that it was not just about increased borrowing costs but also uncertainty over future interest rate levels.

“When the Fed started signaling that hikes were complete and cuts were imminent, capital market conditions began to improve,” he said. “Lower rates are good for transportation as they reduce the cost of purchasing large equipment like trucks. Lower rates also benefit the transportation industry by stimulating demand for goods and assets such as real estate. When interest rates are low, home sales and new residential and commercial real estate will be higher.”

Given these experts’ experience, knowledge, and expertise, it would be foolish to question their views on how rate cuts impact freight transportation and logistics. Their initial feedback is quite optimistic and should be seen as a positive sign for future economic growth and increased demand and volumes.

Source: Logistics Management