The U.S. Federal Reserve cut its key lending rate by half a percentage-point Wednesday in its first reduction since the Covid pandemic, sharply lowering borrowing costs just before November's presidential election.
With inflation falling in recent months and the job market weakening, a rate cut had been all-but guaranteed for Wednesday with the only question being the size. The 50-basis-point cut (half a percentage point) was larger than the 25bps cut predicted by several economists, including Richard Branch, chief economist at the Dodge Construction Network.
“Further, they expect another 50bps in cuts by the end of the year,” Branch said on LinkedIn. “With next meeting in November (two days after the election) and the last in December, it’s good odds that we’ll see further 25bps cuts at each. This is certainly welcome news for the construction industry which has seen activity restrained over the last couple of years as rates shot higher.”
Construction and manufacturing economies tend to be closely matched as building construction demands machinery and raw materials from American factories.
Impact on Manufacturing
The Equipment Leasing Financing Association, a trade group of lenders who finance manufacturing equipment sales, says, "We remain optimistic about the demand for equipment financing. Lower rates are expected to sustain demand, even as the economy cools. Credit quality is strong, and our Monthly Leasing and Finance Index shows continued investment momentum.”
Dan Cakora, pricing economist for manufacturing pricing software company Vendavo, says the rate cuts should make it easier for businesses to borrow money for investments in new equipment. However, "Rate cuts are a double-edged sword…. Exports become cheaper, borrowing is easier, and deals that once seemed unprofitable may now show better ROI. On the other hand, suppliers might see this as a chance to raise costs again, forcing manufacturers to increase their prices to keep margins whole. Customers fatigued by years of price increases may react poorly to manufacturers going to the well again.”
He adds that Federal Reserve Chairman Jerome Powell’s hints at future rate cuts later this year may encourage waiting for December to invest.
John Lash, group vice president of product strategy at supply chain platform e2open, says the aggressive rate cut is good news for the supply chain.
“While inventory levels are elevated (slightly higher than last year), stronger sales will deplete stock levels and increase turns, prompting businesses to order more. At the same time, a lower cost of capital makes it easier for manufacturers and retailers to invest in new inventory – especially with the prospect of stronger holiday sales. This makes the timing of this rate cut more relevant than if it happened closer to the end of the year because there is still enough time to adjust holiday orders,” Lash says.
Ryan Martin, senior research director for industrial and manufacturing at ABI Research, says the rate cuts should spur some near-term spending on equipment, and the cuts should accelerate growth across the entire economy, leading to more orders for factories.
“If demand for goods goes up, there is a ripple that ultimately goes back to the manufacturing sector,” Martin says. However, the biggest challenges facing manufacturers are people and technology problems, not the cost of money, he adds.
“About 70% of digital transformation projects are challenged to kick off due to limited time and expertise, and 50% of the biggest challenges for a successful implementation are around people issues,” Martin says. He adds that rate cuts are “a signal that may ease minds and on the high end of scale for capital investments and drive some decisions. But generally, it will be business as usual for most.”
Steven Blue, CEO of Miller Ingenuity, says the rate cuts may have an impact on some businesses that need to borrow money, but, “I don’t think interest rate cuts will have much of an impact on manufacturing. By the time the interest rate cuts actually get through to the economy, it would have little use.”
Christopher Chidzik, principal economist of AMT – The Association For Manufacturing Technology, echoed Martin’s comments, saying that it’s too early to know what the impact of Wednesday’s cuts will be, but he’s cautiously optimistic.
“The forward guidance shows unemployment deviating little from the longer-term trend. If consumers and businesses take those signals from the Fed and translate them into additional spending and investment in the remainder of 2024, demand for manufacturing technology will surely begin to increase for the rest of the year and remain elevated through 2025,” Chidzik says.
What the Fed Did
Policymakers voted 11-to-1 in favor of lowering the central bank's benchmark rate to between 4.75% and 5%, the Fed announced in a statement.
They also penciled in an additional half-point of cuts before the end of this year, and an added percentage point of cuts in 2025.
“It is time to recalibrate our policy to something that is more appropriate given the progress on inflation, and on employment moving to a more sustainable level,” Powell told reporters after the decision was announced. “This is the beginning of that process.”
The Fed said its rate-setting committee “has gained greater confidence” that inflation was moving toward its long-term two percent target.
It added that “the risks to achieving its employment and inflation goals are roughly in balance.”
The bank has a dual mandate from Congress to act independently to tackle both inflation and employment.
In updated forecasts published alongside the Fed's rate decision, policymakers' median forecasts pointed to an unemployment rate of 4.4% in the fourth quarter of this year, up from 4% in the last update in June.
They also penciled in an annual headline inflation rate of 2.3%, slightly lower than in June.
Smart Industry Managing Editor Scott Achelpohl, IndustryWeek Senior Editor Laura Putre, IndustryWeek Senior Editor Dennis Scimeca and IndustryWeek Associate Editor Anna Smith contributed to this report.
