Fed Reserve Interest Rate Cute Impact on Construction and Manufacturing

• Source: FOR Construction PROS.com

As business owners process the news from the Federal Reserve, which decided on Sept. 18 to cut interest rates by 1/2 a percentage point. Higher interest rates mean a higher cost for borrowing, which can slow construction projects and manufacturing investments.

What does that mean for the construction industry and for heavy equipment manufacturing?

On Wednesday afternoon, various industry organizations released their take on the situation.

The Association for Manufacturing Technology (AMT) had this to say:

“In a highly anticipated move, Federal Reserve Chair Jerome Powell announced the target rate would be cut 50 basis points, bringing the federal funds rate to a 4.75% to 5% target range. This move comes less than a week after the close of IMTS 2024, the largest manufacturing trade show in the Western Hemisphere, where the technology needed to meet consumer and business demands of tomorrow were on display and met with overwhelming enthusiasm by manufacturers.

‘Economic convention says this decrease will help spur additional consumer purchasing and business investment. Fulfilling this additional demand will require the parts and products that are made with the metalworking machinery AMT members provide,’ said Christopher Chidzik, principal economist of AMT.

“A gradual normalization of interest rates would have been a welcome signal the Fed has squeezed inflationary pressures from the economy without tipping it into recession. With this larger cut, Chair Powell has also recognized some growing downside risks to unemployment. While that may cause some to entrench their hesitation into future planning, the forward guidance shows unemployment deviating little from the longer-term trend. If consumers and businesses take those signals from the Fed and translate them into additional spending and investment in the remainder of 2024, demand for manufacturing technology will surely begin to increase for the rest of the year and remain elevated through 2025.'”

Meanwhile, the National Association of Home Builders (NAHB) had this to say:

“While markets have priced-in a good deal of the current, expected monetary policy path into long-term interest rates, including mortgage rates (which have fallen from 6.7% to 6.2% in the last six weeks), the more immediate effect for housing of today’s rate reduction will be seen in builder and land developer loan conditions. Interest rates for such loans should move lower by approximately 25 to 50 basis points in the coming weeks,” Robert Dietz wrote in his Eye On Housing analysis.

A reduction for the cost of builder and developer loans is a bullish sign for housing affordability. The pace of overall inflation has remained higher than expected in recent quarters due to the growth of housing costs and elevated measures of shelter inflation, which can only be tamed in the long-run by increases in housing supply. Chair Powell noted it will take some time for rent cost growth to slow.

We have argued that higher short-term interest rates have prevented needed construction by increasing the cost and limiting the availability of builder and developer loans, thus harming shelter inflation. However, as Chair Powell himself stated, there are other factors holding back housing, including a lack of efficient zoning and other issues that are limiting supply, and the Fed cannot fix those issues. But I continue to argue that lower rates for builder loans will help, as homebuyers, renters and other housing stakeholders wait on state, local and federal governments to enact more effective regulatory policies.”

Meanwhile, the Equipment Leasing and Finance Association issued this statement regarding the Federal Reserve’s action:

“In response to today’s interest rate news, we remain optimistic about the demand for equipment financing. Lower rates are expected to sustain demand, even as the economy cools. Credit quality is strong and our Monthly Leasing and Finance Index shows continued investment momentum. ELFA members are dedicated to providing flexible financing solutions that empower businesses and drive growth in the broader U.S. economy.”

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