Economists weigh in on impact of Federal Reserve rate cut on freight transportation and logistics

Following the September 18 announcement made by the Federal Reserve, regarding the long-awaited interest rate cut, with a 0.5% reduction, to 4.75%-to-5%, there was a fair amount of encouraging feedback from freight transportation and logistics industry stakeholders.

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.

And 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.

Newsroom Notes reached out to a trio of economists to get their respective takes on the rate cut and what it could mean for freight transportation and logistics.

Keith Prather, Managing Director, Armada Corporate Intelligence, explained that, in his opinion, the most surprising element of the rate cut was not the 50-basis point reduction by the Fed but the follow-up rate cut expectations for the rest of the year

“The Fed dot plot now estimates another 50-75 basis points in cuts are possible between now and the end of the year,” he said. “We can estimate a quarter in November and perhaps one in December. This would put the Fed ahead of schedule on its track toward a long-term rate of 2.9%, and hit that rate early in 2026.”

From a supply chain perspective, Prather noted how leading up to the rate cut, the U.S. 10-Year Treasury had been falling in the weeks prior to the announcement—perhaps anticipating the cut—which pulled mortgage rates down enough to see refinancing activity taking place. The benefit of that, he explained, is that can free up consumer discretionary funds, which subsequently can spur growth in certain sectors such as automotive and pockets of retail, among others.

“For larger impacts, it will take some time,” said Prather. “These first cuts and a ‘promise’ of follow-up trimming will pull many large construction projects off the sidelines. The construction sector is a double-edged sword for transportation. It certainly helps lift demand while at the same time can accelerate the trimming of industry trucking capacity (construction is the number one competitor for CDL drivers). This effect is likely to be more of an early 2025 factor for other big-ticket items like automotive, electronics, and others. The cost of carrying capital will also come down, and some firms may decide to be more opportunistic on buying opportunities. Many manufacturers around the world are discounting products to stimulate growth, and with a fairly strong US dollar in place, there will be stockpiling opportunities for some firms. That could spill over into increased warehouse demand, unseasonal intermodal and truckload demand.”

Analysis from Paul Bingham, Director, Global Intelligence & Analytics, Transportation Consulting, for S&P Global Market Intelligence, was in agreement with Armada’s Prather, noting that in regards to the implications for supply chains and goods movement, the Federal Reserve Board dropping interest rates 0.5% will begin a likely path of reductions in the associated cost of capital and inventory carry costs.

And Bingham added that as overall demand in the economy continues to weaken from the pace of consumption seen earlier in 2024, this reduction in rates should help moderate the decline in economic activity.

Even with the 0.5% cut, the fall in rates is only the beginning of reductions that bring rates down from their sustained peak, rates high enough to offset inflation that had hit a 40-year peak in 2022,” said Bingham. “The reductions will encourage more investment and consumption spending compared to what would have been seen in the economy absent the rate cuts. This will result in less of a 2025 slow down than had been previously anticipated, with economic activity at levels that will help sustain demand for goods movement and logistics activity.”

Dr. Walter Kemmsies, president of The Kemmsies Group, a provider of industrial and logistics real estate brokerage and consulting services, pointed out that financing for long-term assets such as real estate became difficult to come by as the Fed hiked interest rates aggressively starting in 2022, stating it wasn’t just the cost of borrowing capital but also the uncertainty about the future level of interest rates.

“Conditions began to improve in capital markets when the Fed began to indicate that it was done increasing interest rates and that it would soon begin lowering them,” he said. “Lower interest rates are good for the Transportation industry because that lowers the cost of buying large equipment, like trucks. Lower interest rates are also beneficial for the transportation industry in that they stimulate demand for goods and assets like real estate. Home sales and new residential and commercial real estate are also higher when interest rates are lower.”

Given the experience, knowledge, and expertise that these three experts possess, it would be a fool’s errand, of sorts, to dispute their views on the impact of the rate cut on freight transportation and logistics. That said, their initial takeaways are fairly optimistic, which should be seen as a good sign for future economic growth, as well as increased demand and volumes, too.