Analysis: How Would Declining Interest Rates Impact Your Business?

How Would Declining Interest Rates Impact Your Business

by Bennett Schmanski
Intern – American Deposit Management
UW-Madison – Class of ‘21

Amid an inverted treasury yield curve, poor early estimates of job growth in May and trade wars being launched on multiple fronts, the United States economy is in a strange place going into the summer. As business investment declines from the sugar high that was large tax cuts in 2018 and as industrial confidence begins to regress, the majority of experts believe that interest rates have plateaued for the time being. Some are expecting that rates may soon drop as the Federal Reserve looks to make “insurance rate cuts” in an attempt to jolt a decelerating economy.

Federal Reserve Statement on Interest Rates

Chairman of the Federal Reserve Jerome Powell and the FOMC decided to keep interest rates the same in June but indicated that it is watching the trade war and muted inflationary indicators to see if a future rate cut is needed. Market futures price in two to three rate cuts by the end of 2019, meaning the Fed will probably be cutting rates soon to appease the market and sustain the historically long expansion.

The Federal Reserve’s main tool against deceleration of growth and inflation is dropping the federal funds rate, the interest rates that banks charge each other on the lending of overnight loans. This rate is the barometer of interest rates in the economy and is used by many financial institutions to determine anything from CD rates to mortgage loan rates. The Fed uses it as its main weapon in combating inflation fluctuations from the 2% target. Lowering interest rates causes people to save less and spend more as the opportunity cost of spending and borrowing decreases relative to the benefit of saving. The opposite is true when the Fed raises rates.

Current Interest Rate Environment

Interest rates remain low with recession fears looming. Leading up to the two prior official recessions in 2001 and 2008-09, the fed funds rate hovered around 5 – 6.5%. That gave the Federal Reserve more room to combat a decelerating economy before reaching the zero bound on interest rates – a level which is being tested most recently by the Germans with their bonds posting a rate of negative 0.3%. Due to the length of this expansion, traditionally one would expect much higher interest rates than what we are faced with today, which is a measly ~2.4% fed funds rate.

Why are interest rates so low in the U.S. and worldwide?

The answer to that question is complicated but revolves around the recession of 2008-09. The “Great Recession” was a much different recession than any seen before it and has created strange economic conditions in its wake. The collapse of the financial markets led to a lack of available credit for those who needed to borrow, and the Federal Reserve needed to slam rates to essentially zero to spur any borrowing and spending. The Fed decided to use an unorthodox method of monetary policy in order to drop rates quickly called Quantitative Easing. This technique is a little controversial but had seemed to be the only weapon against a slowdown of that size and has since been adopted by many countries across the world.

Quantitative Easing around the world has led to lower interest rates. Japan has been easing since the 90’s as they experiment with a new school of economic thought, and the central banks of both Europe and England have been easing their way out of slowdowns recently as well. Since interest rates were low everywhere, the Federal Reserve had to be cautious not to disrupt markets by raising rates too rapidly when coming out of the recession in 2009. It took the federal reserve six years after the official end of the recession to raise rates. Rate hikes were halted in 2016 while global slowdown fears grew and again in January of 2019 when weakness in Europe and a slowing Chinese economy slowed global growth.

Future Interest Rate Expectations

While the near future for interest rates is looking bleak, there are many indications that the economy is strong enough to warrant keeping the fed funds rate steady. Retail sales have risen the past three months and consumer confidence seems to have persisted though the trade war, driven mostly by the strong job market. The Atlanta Fed has raised their Q2 GDP expectations to 2.1%, from 1.2% last week. And with POTUS announcing an extended meeting with China’s President Xi, markets are optimistic that an end to the trade war may be near. In short, global tensions are fogging up what is otherwise great economic indicators from the U.S., and clearing up those uncertainties will help to see a stronger domestic economy and stronger foreign partners as well.

What does all of this mean for you, the customer of The American Deposit Management Co.? It means that rates across the board may be lower than they were just one year ago. Whether in your account with ADM or with your operating funds in your local bank, rates are on the decline. So how do you hedge against lower rates? At ADM we have many options for you. Contact us to discuss the many options including a certificate of deposit (CD) laddering strategy. With over 500 financial institution rates to choose from, we will help you find a competitive rate and appropriate term for your funds.

And as always, if you ever need us, we are here for you. Call 1-800-407-5150, email us at or chat with us on our website. However you want to connect—we are here!


*American Deposit Management Co. is not an FDIC/NCUA-insured institution. FDIC/NCUA deposit coverage only protects against the failure of an FDIC/NCUA-insured depository institution.