Fed’s interest rate announcement and what it could signal to freight market

The Federal Reserve decided not to touch interest rates and indicated just one cut this year – a shift from what analysts predicted at the beginning of the year, which included hopes of freight pushing through a down cycle in the second half of 2024.

On Wednesday, June 12, the Federal Reserve announced that it will keep interest rates unchanged, between 5.25% and 5.5%. Additionally, Federal Reserve Chair Jerome Powell suggested there may be only one interest rate cut this year, which may not come until fall.

The Fed’s latest update on interest rates deviates from its projections at the end of last year. Last December, Federal Reserve officials predicted three rate cuts in 2024.

In Wednesday’s announcement, Powell said that although inflation is moving toward the 2% goal, not enough data gives the central bank confidence that the downward trend will continue.

“We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%,” Powell said. “So far this year, the data have not given us that greater confidence. The most recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward our inflation objective. We will need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%.”

Also on Wednesday, the Bureau of Labor Statistics announced that the consumer price index, not including food and energy, went up 0.2% in May when compared to April, marking the smallest monthly increase since October. The inflation index slowed down in the last two months but remained more stubborn in the preceding months of 2024. Two months is encouraging, but hardly makes a solid trend.

Interest rates’ effect on freight

Although interest rates do not directly affect freight rates, the Federal Reserve’s recent decisions could give the industry a glimpse of what to expect in the foreseeable future.

At the beginning of the year, many analysts predicted that the current freight recession may begin to lift in the second half of 2024. A lot of that speculation was under the backdrop of inflation easing at a quicker rate. In the first quarter of 2024, the Owner-Operator Independent Drivers Association’s Foundation told Land Line that interest rate cuts could be key to higher volume later in the year.

The Foundation pointed out that manufacturing generates about 60% of all for-hire freight. Manufacturing is also in a recession. Interest rates, which are at a 23-year high, have led investors to scale back spending. Manufacturing likely would increase with a decrease in interest rates, thereby increasing for-hire freight volume.

Foundation Research Analyst Andrew King said the latest interest rate news could further delay the next upcycle for freight, which is now not expected until the second quarter of 2025. With freight rates already bottoming out, a lack of interest rate cuts won’t send them further down.

David Spencer, vice president of market intelligence at Arrive Logistics, had a more optimistic view of the Federal Reserve’s latest announcement. Spencer told Land Line that holding back on interest rate cuts indicates continued economic strength. Rate cuts are typically the result of high unemployment and economic slowdowns, all of which can have a negative impact on freight volume.

If or when an interest rate cut does come, it will not be enough to move the needle much.

“A single cut of 0.25% or 0.50% will not produce the changes needed to significantly influence related demand,” Spencer said. “It could potentially take reductions of hundreds of basis points over several fiscal quarters for the economy to see meaningful demand growth from rate cuts.”

In its monthly economic report in May, fleet-management company Motive predicted that the freight recession will end in the third quarter of this year.

“Motive is going beyond its previous prediction of a more carrier-friendly market in 2H and believes the most protracted freight recession in history will end by September of this year,” Motive stated in the report.

Relief from low freight rates may not come as soon as many hope, but several market indicators suggest that the only direction to go from here is up. LL