Mixed reaction to Fed cut

Mixed reaction to Fed cut

According to trucking experts, the dramatic rate cut made by the Federal Reserve this week may or may not have a big impact on trucking. The Fed cut the federal funds rate

According to trucking experts, the dramatic rate cut made by the Federal Reserve this week may or may not have a big impact on trucking. The Fed cut the federal funds rate by three-quarters of a percentage point on Tuesday, worried by the increased risk of a recession. The rate, which fell from 4.25% to 3.5%, is the biggest one-day move since 1984.

Most analysts support the move, although there is still debate whether it is too late and may not be enough to prevent a recession.

“We’re in recessionary conditions, but that doesn’t necessarily mean there will be a recession,” Eli Lustgarten, senior research analyst for Longbow Research, told Fleet Owner. “There will be a muted recovery that is back-end loaded in 2008, as long as the credit markets cooperate”

Lustgarten noted that new emissions rules will stimulate the trucking market in 2009, but right now “there are too many trucks chasing too little freight.” He said that although a delicate balance needs to be maintained, action needed to be taken to improve the credit market. “It’s not the price of money, it’s the availability of money,” he said.

“The economists' standard rule of thumb is that while the Fed rate-cutting actions influence the stock market and Wall Street immediately, they take six to nine months to work their way into the "real" economy,” Jim Meil, chief economist for Eaton Corp., told Fleet Owner.

“Fed actions started as early as last September,” Meil said. “While it may seem long ago now, in the 3rd quarter of 2007 GDP rose 4.9% (much higher than average), industrial production was rising at a 3.9% growth rate (right on average) and the economy was still creating jobs -- indeed, we haven't had one month with a job loss (so far) in the last four years.”

“The Fed has two jobs -- sustain growth in output and employment, and to maintain price stability (keep inflation at low levels),” Meil added. “They have to strike a balance between the two. Those who remember the dysfunctional influences of high inflation of the 1970s, and the costly recession of 1980 to 1982 that it took to bring inflation down, have a real appreciation of what the Fed has done since the mid-1980's to keep inflation low. So it's not fair to pass the judgment ‘too little – too late.’”

Bob Costello, chief economist & vp of the American Trucking Assns. (ATA), supports the rate cut. "We obviously welcome the move and believe it was needed,” he said. “Trucking has been in a tough freight environment for some time now, much longer than the overall economic sluggishness. As we often lead both slowdowns and recoveries, we have yet to see freight volumes recover to a level that suggests economic growth is about to accelerate. We continue to be concerned about the near-term economy."

Steve Latin-Kasper, market data and research director for the National Truck Equipment Association (NTEA), told Fleet Owner he didn’t think the move would have would make a major splash in the near future. “Consumers may buy more in ’08, but to do so they need good credit…the Fed rate isn’t going to put money into people’s hands. Lowering the interest rates isn’t going to fix the credit squeeze, so it’s unlikely there will be an immediate impact.”

“There are a number of economists out there who think that we’re already in a recession, but we won’t know for sure for three to six months,” Latin-Kasper added.

“The biggest benefit of the rate cut may be psychological. If people say there is going to be a recession, it’s a self-fulfilling prophecy,” Gary Petty, president of the National Private Truck Council (NPTC), told Fleet Owner.

“I think, from the private fleets side of the industry, the rate cut isn’t going to do any harm. We’re modestly optimistic,” Petty said. However, he noted that the ups and downs of the credit market don’t always affect fleets. “Trucking is so dependent on people and equipment and technology that it isn’t easily turned on and off and doesn’t always respond to market trends.”

Petty added that recent pushes for greater efficiency and going green will continue to push the trucking industry forward, and that fleets will make cutbacks and adjustments based on customer demand first and foremost.

The Fed rate cut is in addition to the stimulus package proposed last week by President Bush. According to a report in the Wall Street Journal, Speaker of the House Nancy Pelosi and Minority Leader John Boehner agreed in principle late Wednesday night on a bill that provides about $100 billion in tax breaks for workers and $40 billion for businesses.

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