US business ‘optimistic’ about interest rates cuts: Fed

Washington – US businesses say they are “optimistic” about the prospect of falling interest rates, even as economic conditions have remained largely unchanged in recent weeks, the Federal Reserve said Wednesday. 

The US Fed recently voted to keep interest rates at a 22-year high, while penciling in up to three interest rate cuts this year, citing progress made in tackling inflation. 

In past weeks, businesses have sounded optimistic about the likelihood of lower rates in the months to come, the Fed announced in its regular update of economic conditions known as the “beige book.”

“The prospect of falling interest rates was cited by numerous contacts in various sectors as a source of optimism,” the Fed said in the update, published Wednesday. 

This was despite the majority of the Fed’s twelve regional districts reporting “little or no change in economic activity,” since the last report was published in late November. 

Contacts in almost all districts saw signs of a cooling labor market, while almost all of regions reported “decreases in manufacturing activity,” the Fed report said. 

– Cars, shipping concerns –

Auto dealers reported concern about the cost of new vehicles — especially given the elevated cost of financing in a high interest-rate environment.

In the Cleveland region, “auto dealers continued to report slow sales because of high interest rates and high vehicle prices,” the Fed said. 

Although vehicle prices are down slightly from the all-time highs seen in 2022, the average transaction price of a new vehicle was still almost $49,000 in December, according to data from Kelley Blue Book.

In the Philadelphia district, one dealer reported that “higher overall price of new cars — especially given the rising mix of electric vehicles — is further bifurcating the new and used car market, with lower-income households unable to afford new cars.”

And in the Chicago district, dealers told the Fed that “many consumers were substituting toward smaller, more affordable models.”

Another concern cited by respondents was the rising price of shipping, due to a drought impacting the Panama Canal, and disruption in the Red Sea, where Yemen’s Huthi rebels have been targeting commercial and military ships in solidarity with Gaza.

“Spot shipping rates to the East Coast increased as carriers were dealing with issues at both the Panama Canal and the Red Sea,” the Fed said, citing respondents in the Richmond district. 

Meanwhile, in the Atlanta region, “a few logistics contacts hinted at re-emerging supply chain constraints resulting from drought conditions in the Panama Canal, as shippers are forced to deploy to the Suez Canal.”