You’ve probably heard the rumors since this summer. It didn’t happen in September like many thought, but one day soon the Federal Reserve will raise interest rates. According to recent reports, the interest rate hike could occur as soon as December as long as the US economic data continues in its upward direction.
What does that mean for the trucking industry?
An interest rate increase means that the Federal Funds Rate, or the rate banks charge each other to borrow money overnight, would increase. The Federal Funds Rate sets the baseline for all other borrowing activity across the nation. Currently the rate is between 0% and 0.25%. The rates have been historically low since the Recession of 2008.
Jim Meil, an industry analyst for the commercial vehicle analysis firm ACT Research, believes that a single, isolated rate increase like economists predict could happen in a few weeks and would have very little impact on the trucking industry.
In the past, the Federal Reserve has raised the interest rate using a series of small increases over time instead of one big hike. Interest rate increases occur to primarily combat the inflation rate. Meil says that the federal interest rate increase would likely raise the cost of capital. This means that the interest rate used to borrow money to fund new equipment, such as a new truck, and facilities, like a warehouse, could increase.
The interest rate would most likely increase only a quarter or half a point at a time. ACT senior partner, Kenny Vieth, warns that too many interest rate increases in an already slow economy would damage fleet finances and freight markets faster than in a healthier economy.
Vieth believes that even a 1% cumulative increase could lead to trouble for some small trucker companies. It’s common for banks to limit extending loans to smaller, risker, and less creditworthy owner-operators and trucking companies when interest rates are higher.
Not to mention that higher interest rates affects other economic sectors that have a domino effect on the trucking industry. For example, higher interest rates in the auto industry could mean less freight movement for some trucking companies.
However, increased interest rates are not completely bad. For the past seven years truckers have been benefiting from cheaper capital knowing that an increase was on the horizon.
Additionally, Banks would raise the APY on your savings accounts meaning your money in the bank would earn more interest than the measly 1% it has earned over the past seven years. This is great news for those looking to retire in the next few years.
A federal interest rate increase is inevitable. No one knows for sure when it will happen, but some predict it could happen sometime in December. The increase will most likely have some impact on the trucking industry, but it’s certainly not Armageddon.