Federal Reserve issues interest rate cut—with supply chain ramifications

The Federal Reserve’s long-awaited interest rate cut finally came to fruition earlier today, with a 0.5% reduction, to 4.75%-to-5%. This marks the first time there has been a rate cut in four years, with the last one coming in 2020, during the pandemic.

As a benchmark tool that can help spur business activity through borrowing costs, this rate cut comes at a time when inflation is seeing declines, especially since it was at 9.1% in June 2022. For August, the most recent month of available data, it came in at 2.5%. Industry observers have been waiting for this cut for more than a while, as high inflation had a detrimental impact on both supply chain operations, labor, and related business activity.

Federal Reserve officials explained that recent indications suggest that economic activity has continued to expand at a solid pace, noting that job gains have slowed, with the unemployment rate moving up but still low. They added that inflation has made further progress towards the Federal Reserve’s Federal Open Market Committee (FOMC) 2% objective but is still somewhat elevated.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate. In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”

A recently-conducted Logistics Management reader survey of more than 100 freight transportation, logistics, and supply chain stakeholders found that 63% of respondents felt a rate cut would help, with 37% saying it would not.

Reasons cited for the former included: access to cheaper capital helping the sector and various businesses; reducing interest payments and improving cash flow; spurring housing sector growth; and improving consumer demand, among others. And reasons for the latter included: labor issues not subject to interest rates and deflation, among others.

Opinions from industry stakeholders, regarding the impact of the interest rate cut on freight transportation and logistics were cautiously optimistic.

John Larkin, Senior Partner, Transportation & Logistics, for Dallas-based Clarendon Capital, said that it should finally fuel the beginning of an improvement in the freight market

“Manufacturers, distributors, and retailers (brick and mortar and e-commerce) will begin to ramp up inventories as businesses, in general, increase hiring and production volumes,” he said. “The initial interest rate cut, as in the past, will likely have more of a psychological impact on consumers and manufacturers than an economic impact as everyone will assume that more favorable rate cuts will be forthcoming.”

And LM columnist and supply chain consultant Brooks Bentz observed that he would not expect a major impact, at least immediately. 

“Clearly, lower interest rates may help spur investment, which is always beneficial in high-asset-based companies that require such investment in infrastructure and equipment, he noted. “I expect there will be something of a wait-and-see attitude in terms of what happens next, both with the Fed (will it take another swing at this?) and the outcome of the impending election. Nobody knows—not even the candidates—what will happen with the tax structure, for example, so I don’t expect us seeing any major changes, at least for the balance of this year and probably into the first half of next.”

Uncertainty was the key takeaway from Mike Regan, Chief Relationship Officer for Elmhurst, Ill.-based TranzAct Technologies.

“I don’t know what the impact will be, and I don’t think anyone else knows,” said Regan. “The issue confounding everybody is that retail sales are up, yet consumer debt is soaring. Deposits were high, but savings are going back to historical lows. Ideally, you would think any increase in demand would be good.”

Regan added that this interest rate cut comes at a time when there is still high capacity across various modes, coupled with low truckload rates and ocean rates seeing recent declines. What’s more, he noted that the outcome of the election looms large, too, given the differences in the respective candidates’ economic platforms.

Matt Muenster, Chief Economist, for Green Bay, Wis.-based Breakthrough, explained that performance across sectors of the economy will remain uneven following the rate cut.

“Our data ecosystem showed freight demand for durable goods fell for the fourth consecutive month in August, driven by reduced volumes in sectors like automotive and home construction,” he said. “That said, Paper & Packaging saw some year-over-year growth in August (up 3.3%). The 2025 housing market will benefit from cuts. A series of rate cuts will improve mortgage costs for new builds and over time increase the pace of existing home sales where homeowners have been reluctant to abandon their current home and the low rate many locked in before mortgage rates headed higher.”

Total shipments within the Breakthrough ecosystem experienced a year-over-year decline of 5.9% in August, though August saw a slight 2.1% uptick compared to July, according to Muenster.

“We have not yet seen consistent demand data to suggest we are on track to leave the slow freight market behind us,” he said. “Decreasing interest rates are needed to preserve labor market health and if inflation continues to moderate will improve freight market conditions in 2025.”