Don’t Wait for a Better Rate
The interplay between Federal Reserve policy, market expectations, and other factors can make it challenging to predict future interest rates. Even if this were not the case, this article explores the real impact of the headlines on rates and the need of businesses to utilize financing.
There is a broad array of opinions ranging from no change to interest rates to major cuts. Consensus is rates will drop somewhere in the range of 0.5% to 1.5% in 2024. Headlines tend to focus on the Fed’s overnight borrowing rate, while many financial institutions tend to look at the pricing of treasuries or indexes that represent an outlook further into the future. The graph below depicts how five-year treasuries might respond less than expected to radical drops in the Secured Overnight Financing Rate (SOFR).
Significant rate cuts might be necessary if the Fed feels there is greater risk of the economy stalling overall. As the graph above shows, this may not immediately lead to a drop in rates for longer-term lending. Additionally, the motivation for the Fed’s decision to cut rates might be to stimulate a stalling economy, which might not mean lower rates for borrowers. In a slower economy, some lenders will lose their appetite to lend.
If you have a specific need for equipment, there is little reason to wait in hopes of lower future interest rates. In fact, over the past few years, the annual increase in equipment costs would have far offset even a significant drop in interest rates. It is estimated that over a 60-month term, the rate would need to drop more than 1% to offset a 2.5% increase in equipment cost.
Borrowers should consider their business need for equipment purchases and avoid attempting to time the market on interest rates. A finance partner that understands your business and industry is more likely to support your business through changing economic environments. They may also offer leasing solutions that can preserve cash through lower upfront money and lower payments over the term. Explore both our lease and finance options that contribute to long-term financial stability and partnerships.
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