Policymakers at the Federal Reserve on Wednesday announced an increase in interest rates for the first time this year-- and for only the second time since the depths of the Great Recession. And there are expected to be at least some repercussions for trucking.
The unanimous decision by members of the Federal Open Market Committee to raise the federal funds rate from 0.25% to 0.5% to a range of 0.5% and 0.75% follows a similar hike in December 2015, when it increased this rate that banks charge each other for usually overnight loans.
The FOMC also voted unanimously to approve a .25 percentage point increase in the discount rate, the rate the Fed charges banks for loans, to 1.25%
The decision followed a two-day meeting of the FOMC and expectations that small interest rate hikes will be made by the central bank in 2017.
When the Fed increased interest rates a year ago, the expectation was there would be increases in 2016. However, a slower economy in the first half of the year delayed that decision, with more recent numbers showing respectable economic gains beginning with the start of the third quarter.
In a statement, the FOMC said information it received since its November meeting indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year.
“Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft,” the statement said. “Inflation has increased since earlier this year but is still below the committee's 2% longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.” The Fed did say it expects inflation to hit 2% annually.
According to the FOMC, measures of inflation have moved up considerably but still are low while most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
The Fed also said it expects to raise interest rates a total of three times in 2017, up from its September forecast of two hikes, according to CNBC. If that happens, it would result in a federal funds rate average of 1.4%, up from its previous projection of 1.1%, which was described as a “somewhat more aggressive Fed” by CNBC. By 2019, the Fed is forecasting the federal funds rate will be close to 3%.
The Hike Was Expected
The Federal Reserve increased interest rates as expected, according to Lindsey Piegza, chief economist with Stifel Fixed Income.
“The dot plot, furthermore, showed a minimally faster pace of tightening in the near-term with an expected three rate hikes next year, as opposed to two projected in September,” she said. “More importantly, however, the Fed’s longer-run outlook for growth and inflation was unadjusted, leaving the longer-term pathway for rates little changed.”
In other words, Piegza said, the committee sees the potential for a modest uptick in prices and activity over the next 12-24 months. “But in the long run, the Fed’s forecast for a moderate trajectory of the economy remains. Despite the market’s more optimistic view with pro-growth policies potentially ushered in next year, the Fed expects to maintain a slow and ‘gradual’ pace.”
The decision by the Fed came following a report it relased earlier in the day showing U.S. industrial production in November fell by 0.4%, the first drop in three months and the biggest since March. It was pulled lower by manufacturing, which makes up three quarters of the output that includes activity from mines and utilities.
Also a separate Commerce Department report showed U.S. retail sales in November rose just 0.1% from the month before, while October’s hike was revised downward to a 0.6% gain. Compared to a year earlier, retail sales increased 5.3%.
Trucking Will See Higher Interest Rate Effects Sooner and Later
So, what will this most recent interest rate hike as well as others that are expected mean for trucking?
When asked this before the December 2015 rake increase, Jim Meil, industry analysis at commercial vehicle analysis firm ACT Research and former chief economist with Eaton, said “This would raise the cost of capital” – the interest rates used in borrowing money to fund new equipment and facilities. Typically, this means a quarter point increase here and maybe even a half percent jump there, rather than all at once.
Kenny Vieth, ACT senior partner and general manager, said that just a 1% cumulative increase could spell trouble for some in trucking. “There is a tendency, when rates rise, for banks to constrain extending loans to smaller, riskier, less credit-worthy and less financially stable trucking companies.”
Higher interest rates also affect other economic sectors that either generate freight movements or are direct users of trucks, including construction, manufacturing and retail and wholesale trade. Additionally, big-ticket consumer purchases, such as autos, are affected by rate hikes.