The Federal Reserve Board initiated its first step in what is expected to be a steady rise from historically low interest rates yesterday. Interest rates were hiked to 1.25% from 1% yesterday in a move to combat inflationary pressures brought on by the improving economy.
Bob Costello, American Trucking Associations’ (ATA) chief economist, told Fleet Owner that this increase will have a nominal effect on the trucking industry. He said he doesn’t see any specific impact as a result of the current increases.
“It [rate hike] makes financing more expensive, but the thing to remember is it’s still very low interest rates— the lowest in 20 years,” Costello told Fleet Owner, pointing out that the average rate during the 90’s averaged just over 5%.
“It will affect the purchase of equipment, buildings, but that depends on whether it’s a variable rate or not. It can run through a whole gamut of things,” Costello noted. “It can make financing more expensive but it’s still historically low. No one is shocked or alarmed.”
The Fed indicated it would strive for “measured” changes to rates, implying quarter-percent increments, but warned in a written statement “the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.”
By taking the gradual approach to rate hikes the “monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity,” says the Fed.
The Fed noted that output, job growth and productivity improvements are expected to fuel the economy. Inflationary pressures that economists have noticed months ago are believed “to have been due to transitory factors.” Underlying inflation is expected to be relatively low.
Costello noted that recent spikes in fuel and commodity prices comprise only a piece of the economic pie. “Even with oil being as high as it is, with tangible good prices the rate of increase is still very low,” Costello said.
Even ballooning steel and rubber prices aren’t enough to red-flag dramatic inflation, Costello said. “Commodity prices are not necessarily a long-run trend— not to downplay its effects on trucking, inflation by definition is in increase in general prices increasing, not specific items like fuel and steel.”
Historically the Fed lowers rates during recessions to stimulate spending, and vice-versa during good times. To economists, the rate increase can be perceived as a vote of confidence for the economy. “The reason why the Fed is increasing rates is due to a belief the economy is going strong. In a sense it’s a good thing— we know the economy is strong and they’re validating that,” Costello said, adding that he’s confident that there is enough steam in the economy to absorb higher rates.
Although it is difficult to predict long-term trends in interest rates, Costello believes that rates will continue its gradual ascend for the next 18 months. “By the beginning of 2006, it’s reasonable to believe the federal funds rate will fall between 3.5 and 4%.”