Implications for Businesses and Investors
This past September, the Federal Reserve made a significant interest rate cut of 50 basis points—the first of its kind in over four years. It marks a notable shift in regulatory policy following a period of nearly a dozen interest rate hikes since 2022.
Many see the Fed’s decision as an indication that the market, as well as consumers, corporations, and investors alike, will be more prosperous in the months to come. However, with a newly-elected administration entering the White House, ongoing factors will likely work in tandem to determine policymaking and future direction from the Fed.
With that said, experts predict that the Fed will make another interest rate cut at the upcoming November FOMC committee meeting. The site projects a 98.8% probability of the Fed shifting to a 4.5-4.75% target rate, resulting in a projected 0.25% rate decrease.
Ultimately, the implications of these interest rate cuts are quite broad. For consumers, it equates to lower borrowing rates across mortgages, auto financing, and credit card rates. For investors, deal activity ripens with loosened financing and also drives portfolio re-allocations. Below, we dive into what additional interest rate cuts would mean from a broader macroeconomic outlook and look at trending insights found within the AlphaSense platform.
Factors Driving the Interest Rate Rollercoaster
Fluctuating interest rates have been a prevalent theme in the asset management industry for the last couple of years. Starting in March 2022, the Federal Reserve increased interest rates nearly a dozen times in an effort to curb rising inflation. They held steady through July of this year until September’s Federal Open Market Committee (FOMC) meeting.
Dwindling inflation and steady employment figures have contributed to the likelihood of another rate cut in November. Economists are projecting a growth rate near or around 2% for 2025, as disinflation goals set forth by the Fed prevail, with core inflation projected to reach 2.3% next year. Indeed, these factors help to scale federal policy and work in tandem with interest rate cuts to stabilize the economy.
According to CME Group’s FedWatch tracking tool, it is expected that the Fed will cut the interest rate once more before the end of the year, with another incremental cut likely at the January meeting. The FOMC projects a fed funds rate of just 3.4% by the end of 2025.
Implications for Businesses
A trifecta of factors—lower interest rates, curbed inflation, and a new White House administration—will have the greatest impact on businesses heading into 2025. Consumer spending, driven by a decline in interest rates, is expected to be a catalyst for a rebound in purchased goods and drive a healthy demand for manufacturing and consumption.
The Fed’s recent survey of business trends across all 12 Federal Reserve districts, also known as the Beige Book, found an overall increasingly positive trending sentiment relative to previous months, which was directly attributed to the decline in interest rates. The Federal Reserve Bank of Richmond, for example, reported an uptick in manufacturing orders “due to more certainty around the path of interest rates,” while citing that purchasing remained somewhat hindered due to the “nervous period” ahead of the elections.
While businesses continue to keep a close eye post-election on how policy-making might affect their respective industries, lower interest rates will provide financial relief in the form of reduced borrowing costs for loans and lines of credit. As indicated in the Fed’s findings, decisions around headcount or major operational spend will remain in flux pending the implementation of a new administration.
Heading into 2025, the Fed will continue to work to curb inflation to its 2% target and the rate downtrend in order to create a thriving environment for businesses.
Investor Implications
As in the business case, interest rate movements inevitably impact the markets and have a concerted trickle-down effect. For investment managers, navigating a stable to lower interest rate environment allows asset classes to thrive, and as the credit crunch eases, managers will have an opportunity to capture the upside of these economic cycles.
Deal activity is also optimal in lower interest rate environments, especially with the record amount of dry powder available and inflated inventory of shelved deals.
With the initial interest rate cut, the Fed set the stage for a likely resurgence in deal activity. The newly-elected presidential administration remains a variable within the M&A landscape, with potential implications for dealmaking.
Trending Insights from the AlphaSense Platform
Across AlphaSense’s extensive library of public and private content, discussions around interest rate implications are surfacing across every industry and sector:
Housing Sector
If interest rates do perform like we would hope or think they are trending downward, then I would imagine buyers would jump on that opportunity to start their purchase journey because people have been holding out saying, ‘Hey, I’m waiting for interest rates to drop.”
– Expert Transcript | Home Industry Expert
Energy & Utilities
A Fed rate-cut cycle should drive positive utility performance, substantiate or improve valuations & increase return spreads.”
Automotive Industry
When you start adding on the incentives that GM is pushing now to move the metal on the ICE business and with the interest rate becoming a little bit more favorable going forward, I see their internal combustion engine volume, which is the bulk of the volume for them, being better or growing on a year-over-year basis for the following quarters.”
– Expert Transcript | Automotive Industry Expert
Investment Banking
For instance, lower interest rate environments are very, very constructive for M&A activity, so you see trading as well pick up in those environments, and that’s why with rates coming down and what’s happened with the Federal Reserve and expectations of the forward path of the interest rate curve changing in recent months, you’ve seen not only JPMorgan, but a lot of the big banks capturing that in their capital markets businesses.”
– Expert Transcript | Former VP at JP Morgan
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ABOUT THE AUTHOR
Barbara Tague
Content Marketing Manager
Barb is a Content Marketing Manager covering the financial services segment at AlphaSense. Previously, she managed the content program at a global financial services firm.
Read all posts written by Barbara Tague
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