The Fed Cut Interest Rates: What does that mean for your business?
For the first time in more than four years, the Federal Reserve cut a key interest rate by 50 basis points – also referred to as half of a percentage point – on September 18, 2024.
What does this mean for business and the economy?
The Fed has a dual mandate of helping to manage inflation and unemployment.
While there are exceptions to every rule, typically these two economic conditions work as opposing forces.
In the past, it was common for big swings to occur, leading to one or the other of these factors to dominate economic concerns and priorities in the United States. In other words, they took action to either control inflation OR unemployment.
More recently, the Fed has made every effort to balance these aspects to create more gradual and controlled conditions. The Fed has two main tools at its disposal: timing of a rate change and the magnitude of a change.
For example, raising interest rates generally helps to combat inflation, which is why interest rates had dramatically increased over the last few years. Now that inflation is under control, the Fed has chosen to cut interest rates to maintain stable unemployment numbers, while hopefully keeping inflation under control. While half of a percentage point could be considered a big move, it is important to understand that unemployment is a harder benchmark to move than inflation. Moving forward, financial analysts anticipate that interest rates will continue to go down by smaller increments as the Fed is attempting a “soft landing” that balances the economy while avoiding a recession.
How does this impact businesses?
From a business perspective, the rate cut has two main implications:
- Spending versus saving
- Labor and hiring decisions
The current course correction mainly affects short-term loan rates. While longer-term loans will likely not change much, the interest rate cut will be more noticeable in areas such as:
- Lines of credit
- Short-term equipment financing (3 years or less)
- Property loans (3 years or less)
- Credit card rates
The takeaway when it comes to saving versus spending will depend on the length of your financing situation. Since longer-term borrowing will remain pretty stable, for larger projects it may not be worth waiting for interest rates to reduce because those rates won’t budge for a while yet. On the contrary, short-term rates are trending downward. Terms will be more favorable for those smaller projects or variable rate loan options.
In simple terms, it will be easier – and less expensive – to spend with confidence.
Should the rate cut affect employment decisions?
When thinking about the economy with a macro lens, it makes sense that unemployment rates affect demand. When you have a job, you spend more (and vice versa).
We anticipate that demand will stay strong, maintaining the existing spending environment.
Labor is often the largest cost input in almost every business. However, wages seem to be leveling off, which means that acquiring an employee should cost less moving forward. And, if inflation is tamed by the Fed’s actions, then raw materials, equipment, and everything else should become more stable as well, freeing up operational costs to spend on employees.
The one downside? There will likely continue to be a shortage of workers. Demographically, we are losing a larger generation of people to retirement than we are bringing into the workforce. However, thanks to an increasing rate of participation in the labor force – a higher percentage of people are willing to work than during the pandemic – there are more people available overall than had been available in recent years.
How can you make the most of current conditions?
Generally speaking, current conditions and the expected path of interest rates will encourage borrowing and business growth. Businesses will make slightly less on money savings but will spend less on the cost of borrowing funds. This combination makes it easier to consider moving forward on projects you’ve been postponing.
As a community bank with significant resources to support your business needs in any circumstances, talk to your business banker about options. We can help you get the most return on your saving accounts, including deposits, CDs, and money markets. We can also find the best financing programs to level up your business goals.