SalesGlobe Signals is about seeing a bigger, macro view on growth and taking actions that will help you reach your growth aspirations.  This month we'll look at a few signals on interest rates that may be impacting your customers, how you create value, and how you set expectations for your organization.

With this broader, macro view, our focus is on helping executives answer two questions for their businesses:

1. What Are the Market Signals? Indicators you might watch for your business and what they say about what may be ahead.

2. What Does This Mean for Profitable Revenue Growth? Based on the signals, how you may think about growth for your business and the actions you may consider.

High Borrowing Rates, But Change May Be Coming

What Are the Market Signals?

The Federal Funds Rate in the United States, the rate at which banks borrow short-term funds, is 4.5%, down a half point from when it was last lowered in 2024, but far above the 0.25% rates of 2020 through early 2022.

This "high rate" has been the subject of the business news for some time and impacting both businesses and consumers in terms of higher costs for most forms of borrowing including short-term lines of credit, credit cards, auto loans, and mortgages.

Cracks in the Armor. The Federal Reserve, at its most recent meeting in July, voted to hold the Federal Funds rate steady. But breaks in consensus started to show with two Fed Governors, Christopher Waller and Michelle Bowman, dissenting and both favoring an immediate 25 basis point cut, the first time in over 30 years that two governors dissented at the same time. Also, governor Adriana Kugler, who was absent from the July meeting and did not vote, announced her resignation, effective early August, which is before the next Fed meeting in September. So, we'll likely see a more interest rate reduction friendly governor appointed soon by the White House.

Rate Downward Signals. The July unemployment report, released after the July Fed meeting, showed only 73,000 jobs added along with steep downward revisions to the May and June reports of reductions of 125,000 and 133,000 respectively. These signals might indicate a slowing economy, prompting an interest rate reduction in the upcoming September meeting.

Rate Upward Signals. Counterbalancing the unemployment reports, the CPI (Consumer Price Index) which indicates inflation, ticked up slightly from a 12-month low of 2.3% year-over-year in April, to 2.4% in May, 2.7% in June, and steady at 2.7% in July. Similarly, the PPI (Producer Price Index), a measure of wholesale prices, bumped along from a 2.39% year-over-year increase in April, to 2.73% in May, 2.37% in June, and then a jump to 3.29% in July (announced after the July Fed meeting). These signals might indicate increased prices, which an interest rate increase might exacerbate by adding fuel to the economy prompting less of an interest rate reduction.

As we await the next Fed meeting in September, the combination of the above signals predicts an 83.2% probability of a 25 to 50 basis point cut according to the CME FedWatch tool, a bellwether predictor. The increased CPI and PPI reports have dampened hopes for a more aggressive 50 basis point Fed rate cut, with a greater probability of a 25 basis point cut.

Putting Interest Rates in Historical Context. While we're focusing on a micro view of interest rates over the past few years, it's valuable to pull up and take a broader look at where we are historically and what that might mean. Regardless of the upcoming Fed interest rate decision, the United States is at the historically low end of the range on interest rates over the past forty-five years.

If we get nostalgic, we can reminisce about the early 1980s when some of us remember waiting in long lines of cars at the gas station (likely with our parents at the time) due to gas shortages. We could hear The Village People on the car radio. And we paid astronomical mortgage rates. In 1981 the Federal Funds rate was as high as 20%, which meant that rates for everything from car loans to credit cards (of which there were few at the time) to home mortgages were through the roof. Best-selling books at the time included "Nothing Down: How to Buy Real Estate with Little or No Money Down", about how to get the seller of the house you wanted to take a note for the property since bank mortgage rates were unaffordable.

A 20% Fed Funds Rate makes 4.5% look like the deal of the half-century, which it is. Since 1981, interest rates have been on a steady decline and the declining cost of capital has been one of the biggest enablers of US and global economic growth. I recently had the opportunity to attend a presentation by Howard Marks, co-founder of Oaktree Capital Management which was enlightening. He made some points on interest rates that he summarized in one of his Sea Change memos. “The decline in interest rates from 1980 through 2020 was one of the greatest contributors to the rise in asset prices and economic growth.”

The decline in interest rates increased capital investment, provided cheap leverage, and opened up the housing market to fulfill the American dream of home ownership. But it also created structural issues with looser lending standards and increased risk, which ultimately popped in the 2008 financial crisis. There's lots to explore here that's beyond the topic of this month's Signals, so we'll return to present day with our 4.5% Federal Funds rate. Now that we know this is a deal, let's look at what a relatively minor downtick in rates in September might mean for our businesses and our customers, and how we might plan ahead.

What Does This Mean for Profitable Revenue Growth?

Taking a broader view on the historical impact of interest rates can give us some clues about where our customers are now and how a decrease in rates might impact them. We'll look at both business customers and consumer customers, since your organization may sell to one or both.

Where Companies and Consumers Are Now and How They Got Here. As the Federal Funds rate changed (red line in the chart), it impacted two important measures– corporate debt and consumer debt.

Businesses. As borrowing costs fell, corporate leverage expanded. Over the past forty-five years, the corporate debt balance has risen steadily from 45% of GDP to over 80% of GDP as borrowing rates have decreased (purple line in the chart).

With interest rates steadily declining after 1981, companies could finance expansion, acquisitions, and R&D at lower costs. Debt financing became more attractive than equity, allowing faster growth without as much dilution. Lower borrowing costs fueled waves of mergers and acquisitions with LBOs in the 1980s, consolidations in the 1990s and a boom in private equity acquisitions in the 2000s. On the downside, rising debt left companies more vulnerable to downturns, shocks, or sudden rate increases. For example, since the interest rate increases starting in 2022, interest expense from servicing all that debt increased, adding stress and risk to those businesses. So, the same debt load that fueled growth in a low interest rate environment has become a burden, increasing default risk, slowing M&A, and forcing businesses to prioritize debt service ahead of growth.

Consumers. On the consumer side, the household debt balance has risen from less than 50% of GDP to over 70% of GDP, with a dip following the 2008 financial crisis as the easy credit bubble popped, wiping out mortgage balances due to foreclosures as well as writing off consumer debt (green line in the chart). Over the years following the financial crisis, tighter credit standards reduced loan qualifications and pushed consumers to pay down debt until, following 2010, a period of prolonged low interest rates and easing credit standards from banks, consumer borrowing became affordable again.

Rising home values increased available equity in most households and low interest rates made it attractive to borrow from home equity to finance additional purchasing as well as investing in assets with higher returns like the stock market. Growth in household net worth continued to fuel an increase in consumption. Increased consumer spending and inflation outpaced wage growth, reducing increases in real income and driving increased borrowing, especially with credit cards.

Trading savings for debt. Starting in 2022, in an overdue effort to cool spending, the Fed increased the Federal Funds Rate. We flipped from the highest total US consumer savings level in 2020-2021 of about $2.1 trillion to only about $350 billion in Q2 of 2024. Along with the draw down on savings, total credit card balances increased from about $770 billion in 2021 to about $1.1 trillion in mid 2024 as consumers financed their consumption with high-rate debt. Available housing inventory also tightened as households stood pat with mortgage rates from the past several years (often below 4%) that were lower than what’s available for new mortgages (now approaching 7%).

If the Fed Decreases Interest Rates, What Customers Should You Prioritize? As we approach the next Fed decision, as well as subsequent rate decisions, some of your business and consumer customer groups will receive greater benefits than others and may provide better opportunities for your business.

10 Questions about your Customer Strategy for Fed Rate Reductions. To set your direction, here are ten questions you may ask your organization:

1. Which business to business segments will see the greatest benefit from a reduction in interest rates?
2. Which business to consumer segments will see the greatest benefit from a reduction in interest rates?
3. How do our offers best align with the beneficiaries?
4. What is the best value proposition for each beneficiary segment?
5. How do our offers best align with segments who may not see the same level of benefit? For example, if large corporations, who are cash rich and don't use as much debt as mid-sized companies and don't see the same level of interest income on their cash, how might we help them?
6. What is our Customer Strategy for Fed Rate Reductions for each target segment in our business and consumer markets?
7. How can partners or alliances help us to create and implement a more compelling value proposition as part of this strategy?
8. How can we develop an actionable plan for our marketing, sales, and operations organizations to implement our interest rate reduction customer strategies and take them from concept to results?
9. Can we better support our teams through the right resources, enablement programs, and training?
10. How can we sharpen focus and motivate our teams across functions with the right financial incentives?

To get you started, here are some potential customer focus areas, depending upon your markets and offers. Some of these may be targets for your organization and part of your Customer Strategy for Fed Rate Reductions along with the right value proposition for each segment.

Which Customers Should You Target? Some Considerations for Your Business Customers

Greater Benefit

• Mid to large companies are big users of lines of credit and floating rate debt with interest rates that change with the market. They may also use syndicated loans and corporate bonds which are tied to benchmark rates like prime rate or treasuries. Lower interest rates will lower their debt service costs and increase their profitability, buying power, and ability to grow.
• Small companies may also benefit from lower interest rates if they use lines of credit with variable rates. If they borrow with fixed term debt like SBA or equipment loans, they may not see as much of a near term benefit.
• Construction and engineering services companies are capital-intensive, project-based, and often rely on lines of credit for working capital. Lower interest rates will lower their debt service costs and increase their profitability, buying power, and ability to grow.
• Heavy industrial manufacturing companies have high equipment financing costs and lower interest rates can reduce their CAPEX. This can reduce their debt service costs and increase their profitability, buying power, and ability to grow.
• Transportation and logistics companies finance their fleets, warehouses and rolling stock. Lower interest rates will increase their profitability, buying power, and ability to grow.
• Commercial and residential real estate development or services companies benefit from lower rates that increase the viability of their new development projects. Since many commercial real estate loans have short term maturities, developers and owners have existing properties with debt that must be renewed or refinanced every five years, and lower interest rates can make the difference between profitable projects or eventually giving the property back to the bank. Lower rates can create opportunities for developers, their suppliers, and partners.
• Capital equipment leasing and financing companies have customer demand that's related to interest rates. Lower rates may stimulate demand from customers for financed purchases and, in turn, increase their profitability, buying power, and ability to grow.
• Wholesale or retail distribution companies finance large inventories and receivables from customers, often with short term lines of credit. These companies can range from consumer and industrial products distributors and dealers to components distributors and dealers to automotive dealers. Lower interest rates increase their profitability, buying power, and ability to grow.
• Business-to-business tech hardware companies often finance their purchases, and lower rates can increase demand and revenue for these tech hardware companies. That, in turn, can increase their profitability, buying power, and ability to grow.
• Financial services firms that include banks, private equity, and other financial services could see a benefit on the volume side of their businesses with increased customer demand and greater deal volume from M&A fueled by lower rates. Of course, the interest rates organizations like banks receive from their customers for commercial and consumer debt would be lower, potentially lowering revenue from those service lines.

Moderate or Lesser Benefit

• Cash-rich mega cap companies (e.g., the Fortune 100) already hold positive cash balances, and less debt so make interest on their cash rather than paying interest. For example, Apple, Microsoft, Alphabet, Amazon, and NVIDIA each hold between $50 billion and $100 billion in cash reserves.  So, a reduction in interest rates may not benefit them as much and you'll need to craft a value proposition that addresses their unique needs. Indirectly, however, these companies would benefit from increased business from business customers in other industries as well as consumers.
• Professional services and consulting firms have lower capital intensity because most of their services are provided by professional labor, so may not see as much of a benefit from lower rates. However, some professional services organizations, such as technology services, also resell hardware and software as part of their offer, which they may finance. So, lower rates would create a benefit for value-added resellers. A secondary benefit to professional services and consulting firms comes from increased client spending in the industries described above.
• Software companies may not be as capital intensive because their offers are typically not created from purchased components and may not see as great of a direct benefit from a rate reduction. However, as with all industries, software organizations would benefit from increased demand from customers in other industries who would benefit directly from a rate reduction. Another benefit to this industry could be increased equity investment from venture capital and private equity firms as deal volume increases with lower rates.

Which Customers Should You Target? Some Considerations for Your Consumer Customers

Greater Benefit

• Homebuyers and refinancers will see a clear benefit from an interest rate reduction, with lower mortgage rates, although mortgage rates don't move in lockstep with the Fed Funds Rate. A reduction in mortgage rates, at some level, will be enough to trigger some sellers who are holding tight with lower current mortgage rates to put their homes on the market and purchase a next home with an attractive rate (albeit not the 4% rates of 2021). Lower rates will likely move would-be buyers into action because mortgage payments will be more manageable and, depending on the level of selling of current inventory and new construction, there may be greater total inventory in the market.
• Homeowners using home equity may have access to more attractive home equity line rates, allowing them to spend their equity on purchases that may range from home improvements to college tuition to additional discretionary consumption. Depending on the eventual level of rate reductions, it is possible that homeowner access to more home equity in a market with rising home prices and values, prompted by a greater increase in demand than housing supply, can recreate the wealth effect of 2020 to 2022, which could fuel greater overall consumer spending, the biggest driver of the economy.
• New homeowners and homeowners moving to their next homes often want to complement their new home purchase with furniture and accessories which they may do with access to greater home equity and the lower interest on credit cards. Companies selling anything for the home, including furniture, home goods, and lawn and garden may find this group of consumers attractive.
• Drivers and new younger drivers of automobiles may find that the time is right to trade up to that new set of wheels or get the newly licensed teen into a safer new or used car than the one grandma donated. With lower auto interest rates, and of course greater loan maturities from the traditional 36 to 48 months out to 72 months and beyond, will make car buying more affordable for people who buy according to their monthly car loan payments.
• Credit card borrowers would see lower APRs on their cards and lower monthly debt service. Lessening the monthly burden could free up credit and increase spending across categories from meals out to groceries to consumer goods. This could drive demand across business segments.
• Households with investment portfolios (about 35% of US households have 401k or similar accounts) or who are retail investors would likely see continued growth in their portfolios, due to a continuing increase in stock valuations (see Business Customers above), contributing to the wealth effect and fueling discretionary spending.

Moderate or Lesser Benefit

• Retirees who live off of fixed income vehicles (e.g., CDs, bonds, and money markets) may see lower returns as yields and rates come down. A common practice as retirement investors near retirement is to invest in these lower volatility, more predictable investments which also have lower returns. For retirees who are still heavily invested in the stock market, like my 92-year-old day-trading dad, they would benefit like other market investors.
• Cash-rich households may see less benefit from lower rates on consumer debt and mortgages, which they may not use. However, they would see a direct benefit from investment returns and businesses in which they have ownership.

Don't Forget the Federal Government

Yes, the federal government is one of the biggest beneficiaries of lower rates. In 2024, the government spent $890 billion on interest servicing the national debt according to the Congressional Budget Office. National debt interest is the fastest growing line item in the budget and second only to social security at $1.4 trillion. National defense and Medicare are tied for third place with both about $850 billion of the budget. So, like a household underwater with debt, a reduction in the Fed Funds Rate could ease the burden on the federal budget if it's not spent somewhere else.

With rough math, reaching a steady state over several years if the full $27 trillion of publicly held federal debt balance is repriced at a 25 to 50 basis point reduction, it could save $60 billion to $135 billion per year in expense. No wonder there's pressure on the Fed to reduce rates. If your company is a government contractor and has agencies of the federal government as customers, you may have big opportunities.

Your Call to Action

Each of the ten questions and the potential impacts on the business and consumer segments should prompt valuable conversation and ideas around your business and your Customer Strategy for Fed Rate Reductions.

Look at each of the signals we've discussed around interest rate changes. Then, consider their impact from two perspectives: How will they affect your customers and their ability to grow? How will they affect your business?

Get beyond current state and ask your team where they see the signals projecting ahead and what this means for your organization's profitable growth. Consider each of the questions I've asked, add your own, create a plan, and get into action. Questions for us? Email us at info@salesglobe.com or contact us at SalesGlobe.com. ______________________________________________________________________________

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