US Fed cuts rates again, construction should benefit
08 November 2024
The US Federal Reserve announced a 25-point cut on its Federal Funds Rate, lowering the interest rate at which financial institutions borrow from one another to a range of 4.5-4.75%.
US Federal Reserve Chair Jerome Powell during the International Monetary and Financial Committee (IMFC) plenary session, during the International Monetary Fund and World Bank Group 2024 Annual Meetings, in Washington, D.C., on 25 October, 2024. (Image: Graeme Sloan/Sipa USA via Reuters Connect)
It’s just the second rate cut in more than four years. The rate was briefly slashed to 0-0.25% in March of 2020 amid the onset of the Covid pandemic but had risen ever since until September of this year when the Fed reduced the rate by 50 base points.
While the 7 November move was largely expected by the industry and market, it’s official announcement on Thursday confirmed that the US feels strongly about its prospects on further combating inflation and avoiding a recession.
Overall, it should paint a rosy picture for construction firms for 2025 and forward, even though the Federal Funds Rate only indirectly impacts borrowing and investment in the industry.
Les Hiscoe, CEO of Massachusetts-based Shawmut Design & Construction, told Construction Briefing, “While the construction industry will feel most of the effects of this latest rate cut down the line, in 2026 and 2027, this signals a trend in the right direction.”
Hiscoe noted, with borrowing conditions improving for the banks, the possibility of new starts is more likely.
“This rate cut and the indication of more to come are giving developers confidence to bring projects off the shelves,” he said. “The first we’ll see into the pipeline are the ones with the greatest expected returns, including class ‘A’ commercial space, hotels and mixed-use projects.”
Omar Eltorai, research director at Canada-based consultancy Altus Group, pointed out this indirect correlation between the FFR and consumer borrowing.
“The Fed Funds Rate is not the rate at which businesses, investors, or consumers borrow or access financing, so these effects will take time to flow through,” explained Eltorai. “However, the signal sent by the first cut may be beneficial in the near-term, as this shift in policy stance can be factored into business projections, expectations, and valuations.”
The news can – but doesn’t necessarily always – have an effect on US mortgage rates, as well. At present, a 30-year fixed mortgage in the US average 6.75%, which is only slightly elevated from the 30-year average but much lower than the nearly 8% rates which topped out in late 2023.
With any additional momentum downward on the mortgage rate, and if more potential buyers are compelled to become buyers, construction firms could see an uptick in residential construction activity as early as next year.
Joe Schneid, a CPA and CCIFP with Alrich CPAs + Advisors, said to expect renewed availability of bank financing, a steadying of production wage and material costs and more options when it comes to borrowing, overall.
“A downward change in rates should free up bank financing on market-rate housing and commercial building projects,” he said.
In the present, Hiscoe said “companies need to be planning now because proactivity and upfront collaboration will be the key to capitalising on the future opportunities.
“We are in regular discussions with our clients and partners, so as projects enter their initial stages, we can provide guidance. That’s critical to drive best results for the budget, the schedule, and the final product.”
CONECTAR-SE COM A EQUIPE
