A big change from the Fed’s rate cut: business owners’ mindsets
A big change from the Fed’s rate cut: business owners’ mindsets
It’s been nearly three weeks since the Federal Reserve cut interest rates for the first time in more than four years. While it’s true that the federal funds rate, which the central bank controls, is 0.5% lower as a result, not all that much has changed in the economy.
Businesses aren’t suddenly jumping into new projects. They’re probably not loading up on new equipment or building out new factories. But perhaps the biggest change wrought by the rate cut was in business owners’ mindsets.
Over the last few weeks, John Kirk, CEO of the Lightpath Co., an apartment developer in New Braunfels, Texas, has been getting a lot of unsolicited phone calls.
“I’ve had my iPhone ringing from lenders who’ve been on the sidelines for the last 12 to 18 months,” Kirk said. “They’re starting to call and say, ‘Tell me, what are you working on?’”
Kirk said for most of the early part of this year, developers had trouble getting loans. That’s because interest rates on construction loans were high, along with construction costs, which made new projects expensive and risky. But Kirk said that’s starting to change.
“You’re seeing construction costs level out, and now you’re seeing interest rates drop,” Kirk said. “So you’re starting to see market fundamentals start to come back into play to make economic sense of these projects.”
Kirk said he’s not breaking ground on any projects right now, but he and other developers are laying a lot of groundwork.
“You’re investing with all your architects, your engineers, all your consultants,” Kirk said. “You’re spending money to get a great set of drawings, submitting for permits. As a developer, you’re making sure the site can be developed.”
It’s not just big, expensive projects that are being affected by the Fed’s rate cut. It’s also the small, day-to-day realities of running a business.
“Each month we’re paying between $5,000 and $7,000 just to debt,” said Madeline Reeves, founder and CEO of Fearless Foundry, a marketing and consulting firm near Seattle.
Reeves has been trying to pay down her business debt. Right now, she’s focused on one of her business credit cards with a balance of about $27,000.
“We’re paying, right now, somewhere between $2,000 and $3,000 a month on that credit card,” Reeves said. “It’s making a dent, but not really as much as I wish it could, because the interest rate on that card is close to 30%.”
Reeves said she’s thinking about taking out a new loan at a lower rate to cover that debt or transferring the balance to a cheaper credit card. Either way, she can think of a lot of ways she’d rather spend that money than paying 30% interest.
“One would be to put more money in the pockets of our team members, and two would be putting money into a profit account or savings account that we can actually be holding on to that capital for a rainy day,” Reeves said.
Meanwhile, other business owners see the Fed’s action as a sign that they can start feeling more confident.
“Our level of caution is reduced is probably a good way of saying it,” said Spiro Pappadopoulos, CEO of Schlow Restaurant Group, which operates seven restaurants in several states.
Pappadopoulos said he’d love to operate more restaurants. And now that interest rates are lower, he’s been having more conversations with commercial real estate brokers about expanding.
“Like, hey, you know, even though we may have passed on X six months ago, I still want to see opportunities like that, and our appetite for them is more than it was in the past,” Pappadopoulos said.
A big reason Pappadopoulos feels bolder about expanding is that lower rates also improve consumers’ mindsets.
“If new car loans are back to, like, 1% or 2% because they’re incentivizing them, and [consumers] can shave a couple points off their mortgage and put a couple hundred, 200, 300, 400 more dollars into disposable income, then that affects restaurants a ton,” Pappadopoulos said.
That would also help retailers, service providers and all the rest of the more than two-thirds of this economy that’s driven by consumer spending.
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