How rate cuts will impact businesses

How rate cuts will impact businesses

What does the recent rate cut from the Fed mean for businesses?

The US Federal Reserve opted to cut interest rates by 0.25 basis points, following an earlier cut in July. For most US businesses, the impact is likely to come less from the rates and more from the environment that prompted the cut and the knock-on effect on the dollar. The cut was good news for business owners; the action makes it cheaper to borrow for businesses and consumers and that helps to fuel economic growth. However, interest rates are already at an historic low which means that borrowing hasn’t been a particular issue – fluctuations in the dollar and uncertainty in global trade are putting the pressure on businesses more than interest rates.

Economic growth has been slowing across the world, and together with the trade tensions between the US and China, this is having an impact on global opportunities for businesses. Federal Open Market Committee (FOMC) Chairman Jerome Powell highlighted that while the rate cut was a “powerful tool” to support businesses, it wasn’t the complete solution. He dismissed the President’s calls for negative interest rates, stated that the issue for businesses was more that they required “a settled roadmap for international trade.” Talks between the US and China are scheduled to take place next month, but until a clearer picture of any new agreement emerges, it’s hard to predict whether this will alter the current trend of slowing growth. There are also additional disputes emerging with Europe and elsewhere, which may further stall growth.

The decision to cut rates is a reversal of policy from last year, when a healthy economy meant that it wasn’t required. The current situation - low inflation, a fall in job creation and growth slowing to 2% in the second quarter – prompted the need for a cut and also highlight the key challenges that the business is facing. The focus of the Fed statement was on global trade as the key to supporting growth and boosting the US economy and the tone was hawkish, suggesting that there were no plans for further cuts.

The dollar benefited from the fact that the FOMC has yet to set a definite course that includes more cuts, and it rallied against the euro and other currencies after the statement. However, the uncertain economic pictured is mirrored by split opinion within the FOMC. The latest rate cut was brought about after seven members voted for it, but two members voted to hold rates and one wished for a larger cut. This was perhaps the reason why the dollar couldn’t sustain a rally, retreating the day after the Fed’s decision was announced. Opinion is divided on whether there will be further cuts this year or in 2020 and whether they will be warranted which can make the currency market react to any indication of a future direction.

 

If a business has any global connections, either imports or exports, then the value of the dollar may have more of an impact than interest rates. The rate decision may move the dollar, but it’s not the only factor. A weaker dollar can make exports more attractive overseas, but can increase the cost of imports. Similarly if the dollar makes gains, this can make imports better value but may see a business under pressure on prices when it comes to exports. A range of global political and economic factors have an impact on currency values, so while it’s worth keeping an eye on the actions of the Fed for future rate cuts, it’s not the only factor when it comes to the dollar or business growth.

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