The Federal Reserve's recent interest rate cuts are presenting CFOs with the opportunity to borrow money on more favorable terms for priorities like expansion or acquisitions.
"We work with a lot of CFOs in the middle market space and we're seeing a number of trends," said Ro Sokhi, an audit partner at UHY. "The CFOs that I'm talking to are generally optimistic that the interest rates are being lowered. The last few years we saw the use of private capital, used to finance different transactions, but that's expensive. There's a lot of excitement these days that the Fed is lowering the borrowing rate, and CFOs can reenter the traditional funding market."
He is seeing three broad areas where CFOs can plan to benefit from lower interest rates: a better environment for capital expenditures, a positive hiring perspective, and a boom in potential deal-making.
Last week's 0.25% interest rate cut came after a larger 0.5% cut in September. "The market definitely feels like there are more rate cuts to come," said Sokhi.
He expects to see an impact in various industries such as life sciences, retail and technology.
"What we're seeing in the life science company space is CFOs are facing patent cliffs as patent protections expire and roll off," said Sokhi. "Lower interest rates give CFOs the fastest way to rebuild that R&D pipeline through M&A. At retail companies, during the higher interest rate epoch over the past few years, we've been seeing CFOs of historically brick and mortar companies continue to make investments and migrate more toward consumer friendly e-commerce and online platforms. While some of that investment in capex and SG&A slowed down, we'll continue to see that migration toward e-commerce and investment toward those kinds of platforms continue and expand. And then, from a technology perspective, very similar to life science companies, we'll continue to see consolidation and buyouts of smaller companies, as larger companies look to enhance their R&D pipeline and to eliminate the smaller companies from competition."
Federal legislation has helped too, such as the CHIPS and Science Act of 2022. "We're seeing that newer enhanced committed capital in the semiconductor space because of the CHIPS Act," said Sokhi. "All of these are going to be enhanced as we see further interest rates [cuts] reduce the cost of capital."
Accountants may wish to advise their clients to take advantage of the lower borrowing costs as interest rates go down, but there is always some degree of uncertainty about Federal Reserve policy.
"It's never certain as to what direction the interest rates will definitely go and whether companies can absolutely take advantage of the capital once the money comes in," Sokhi cautioned. "But in the near term we're continuing to see companies finding alternative ways to free up capital, either through cost reductions or working capital programs, and then divesting of non core assets, brands and things like that. What we're seeing is a combination of using capital that's available, as well as using the newfound lower interest rates."
Even with the incoming Trump administration taking over the White House next year, Federal Reserve chairman Jerome Powell has expressed his desire to remain at his post and preserve the Fed's traditional independence on setting interest rates.
The Bank of England and the European Central Bank have also been lowering interest rates in recent months, and that's expected to continue as well.
"Another thing that companies will have to think about is it's not just the Fed that's reducing rates," said Sokhi. "There are other central banks that are also reducing rates, in fact, some of them faster or earlier than the Fed. Companies will need to think about which lending markets do they want to take advantage of, if they have access to different jurisdictions, and really think holistically and globally about their operations and pipelines and supplies. We would expect global rates to decrease, and we're seeing a global trend in the central banks reducing rates."
