How Could Lower Interest Rates Impact Business?

At the annual Jackson Hole conference, Federal Reserve Chairman Jerome Powell delivered the news that many business leaders have been awaiting – interest rate cuts are coming soon. He did not provide specifics on the timing or pace of the rate reductions but most analysts expect the first cut to come in just a few weeks at the September FOMC meeting.

Interest rate cuts are generally positive for businesses, but that is not always the case. Some businesses will see rapidly increasing sales when rates decline, while others that rely on interest income will need to find ways to protect their profitability. In any event, it’s important for decision makers to understand the impact of rate cuts and how to adapt their operations to be successful in the new environment.

Lower Rates Are Good for Most Businesses

For many businesses, lower rates are a driver of profitability. There are several factors that contribute to this dynamic including higher sales, lower borrowing costs, and easier credit – situations that often accompany lower rates.

Businesses Can Save On Interest Payments

With lower interest rates, businesses can save on loan payments. If your company has adjustable-rate loans, you could see the benefits of lower rates in the near future. On the other hand, if you have fixed rate loans you could see the effects whenever you refinance or take out new loans.

Consumer Spending and B2B Sales Tend to Rise When Interest Rates Fall

Like businesses, consumers will likely see lower interest payments following rate cuts. These lower loan payments create additional room in their budgets to buy other goods and services. For this reason, the overall level of consumer spending tends to rise when interest rates fall.

When rates decline, higher consumer spending can drive revenue for businesses, especially those that sell big-ticket items which typically require financing. Additionally, businesses in the consumer discretionary sector tend to see higher sales as families gain more disposable income.

Lower Interest Rates Can Lead to Higher Stock Prices

Rate reductions that occur outside of a recession have historically foreshadowed positive results for stock markets. In fact, the S&P 500 has risen by an average of 18% per year in such circumstances since 1970. This is because lower rates in a healthy economy generally equate to more profits and higher valuations for growth stocks.

Rate Cuts Can Be a Boon for Commercial Real Estate Values

When interest rates decline, so do borrowing costs. This means more buyers can afford to purchase properties, and that dynamic drives competition higher. In turn, more competition for commercial real estate generally leads their values to rise as rates decline.

These are just a few of the ways that lower interest rates can reduce costs and drive profitability for businesses. However, there are also downsides that can impact certain companies.

Certain Businesses Can Struggle When Rates Decline

While many businesses applaud lower rates, certain sectors will see their profits reduced when rates decline. Cash-heavy companies and those whose revenue depends on prevailing interest rates are the most obvious of these. In both cases, lower rates directly reduce their expected revenue.

Interest Rate Dependent Companies Often See Lower Revenue After Interest Rate Cuts

Banks, Credit Unions, and private lenders are some examples of organizations that depend on prevailing interest rates to drive their profits. When rates go down, their loans will be issued at a lower rate, and therefore, a lower profit level. The declining revenue can be offset by increased business – as detailed in the prior section – but this is no guarantee. This means businesses that rely on interest rates to drive their profits will need to focus heavily on growing their client base to offset the lower profits from lending activities.

Returns For Cash Reserves Could Fall Following Rate Cuts

Businesses with large cash reserves can also see reduced income after rate cuts, because returns for many types of cash investments fall with prevailing interest rates. For example, yields for Treasuries and money market mutual funds tend to react quickly to changes in monetary policy since these instruments – or their underlying investments – are based in part on the Fed Funds Rate.

On the other hand, banks have autonomy to set the rates they pay for deposit accounts. Therefore, rates for money market accounts, CDs, and savings accounts tend to react more slowly to interest rate cuts.

As the interest rate cuts grow nearer, your business may need to adjust its strategy to take full advantage of the benefits of lower rates – like higher sales, lower costs, and even improvements to your property values. Fortunately, there is a way to mitigate the negative outcomes of lower returns on cash reserves.

Lock In Today’s Cash Yields with a Term Deposit Account From ADM

At the American Deposit Management Co. [ADM], we offer deposit management solutions  that help businesses offset the impact of interest rate cuts. In particular, our term deposit accounts allow you to “lock-in” today’s high interest rates.

With our network of over 400 financial institutions that compete for deposits, you can capture competitive returns from banks and credit unions across the nation. Additionally, our solutions provide access to extended government insurance from the FDIC or NCUA – the ultimate protection for your cash.

To learn more about how we can help you optimize cash, contact a member of our team today.

BACK