In a sign that inflation is waning (and lending may be back in fashion), the United States Federal Reserve cut its benchmark interest rate this week for the first time since 2020.
Federal Reserve Chairman Jerome Powell surprised many analysts by cutting the rate by half a percentage point—the largest cut from the Federal Open Market Committee since emergency measures taken during the 2008 financial crisis.
The key interest rate now sits at 4.8 percent after previously peaking at a two-decade high of 5.3 percent for the past 14 months.
Unlike the blockbuster rate-cutting that took place in 2008, however, the latest moves by the Fed are actually in response to confidence in the economy, as inflation stateside has curbed significantly in recent months. After peaking at 9.1 percent in 2022, inflation had cooled to just 2.5 percent in August 2024, showing a clear path to the Fed’s 2 percent target that prompted action on rate cutting.
“We’ve waited. And I think that patience has really paid dividends in the form of our confidence that inflation is moving sustainably under 2%, so I think that is what enables us to take this strong move today,” Powell told the press in an announcement on September 18.
Powell was sure to add that the Fed’s work to bolster the economy (and improve lending conditions in the process) is far from over, adding “we’re not saying mission accomplished.”
Unemployment trending up—but timing is everything
Despite reporting faster-than-expected drops in the inflation rate—and forecasting a more positive outlook on inflation than last quarter—Powell indicated that the unemployment rate was actually moving in a different direction. While the Fed had previously pegged end-of-year unemployment to peak at 4 percent before holding steady at 4.2 percent for 2025, both figures have been bumped up to 4.2 percent and 4.4 percent, respectively.
As Powell explained in his statement, by cutting rates today, the Fed hopes to provide economic support through rate cuts that will hopefully help stem a potential surge in layoffs or unemployment claims.
“We think this is timely. But I think you can take this as a sign of our commitment not to get behind. We’re not seeing rising (unemployment) claims, not seeing rising layoffs, not hearing from companies that that’s something that’s going to happen,” Powell told the press, adding, “There is thinking that the time to support the labor market is when it’s strong and not when you begin to see the layoffs”
Another factor to consider is that the recent rise in unemployment projections is less a sign of layoffs and is actually reflective of a rise in new talent looking to enter the workforce—namely, new immigrants and recent college graduates.
This has been a development on both sides of the border, as the unemployment rate in Canada recently saw a jump to 6.6 percent in August that was directly attributed by economists to a lack of available opportunities for talent hoping to enter the workforce.
Ideally, the moves by U.S. officials to promote expansion by making borrowing more affordable will promote expansion on both sides of the border among innovative businesses that need the fresh (and skilled) talent to thrive.
Lower rates favor expansion—but don’t expect a VC surge
In an interview with Inc., Erica Groshen, senior economics advisor at Cornell University and former commissioner of the U.S. Bureau of Labor Statistics, explained that at a baseline, “[c]ompanies are more likely to invest in adding new facilities, expanding production, research and development and similar activities,” as a result of lower interest rates.
This comes as lending markets loosen and loans become more affordable for businesses at all stages of their lifecycle.
But it’s also important to remember that these rate cuts are just one piece of a very large puzzle facing innovative business owners today when it comes to funding their business for growth.
As Groshen also warned, venture capital (VC) lending may improve after softening globally over the past year, but businesses shouldn’t expect a deluge of renewed investment. The wait-and-see approach that many VCs held onto over the course of 2024 may go on even longer, as Powell indicated at least one more rate cut from the Fed before year’s end.
In times of uncertainty, make innovation your differentiator
While the math on lower interest is fairly straightforward as it relates to the implications for business owners, the market reactions to the news are harder to predict—especially in an election year that has pushed many investors to remain on the sidelines until after the November elections.
Business owners have no time to wait when it comes to riding out down cycles or market uncertainty to give their products the shot at success they deserve. And while traditional lending or VC investment are two primary ways that businesses fortify their runway, focusing on truly unique R&D is yet another avenue for growth that businesses can leverage when outside funding is tight.
In both the United States and Canada, there are billions of dollars in innovation capital on offer that businesses can tap into as a recoup on their investment into product development when they’re able to demonstrate that they are driving truly unique R&D. This can help cover a significant portion of a business’ product development costs while helping uncover market white space and deliver stronger, more competitive solutions.
Along with unlocking sources of funding, putting a greater focus on innovation makes businesses more attractive in the long-run for both government funding, as well as private investment down the line. After all, by stretching every dollar of private equity further through programs like R&D tax credits, businesses are demonstrating they are savvy with their investments while striving to deliver stand-out products.
At Boast, we make the process of capturing R&D tax credits seamless for customers while maximizing their access to the growth capital they deserve. To learn more about how we’ve helped hundreds of innovative businesses across North America maximize their access to R&D funding, talk to an expert today.
US Fed Cut FAQ
- What recent action did the US Federal Reserve take regarding interest rates? The Federal Reserve cut its benchmark interest rate by half a percentage point, bringing it down to 4.8% from a two-decade high of 5.3%. This is the first rate cut since 2020 and the largest since the 2008 financial crisis.
- Why did the Federal Reserve decide to cut interest rates? The rate cut is in response to cooling inflation, which has dropped to 2.5% in August 2024 from a peak of 9.1% in 2022. This shows progress towards the Fed’s 2% inflation target. The move also aims to provide economic support and potentially stem a rise in unemployment.
- How might these lower interest rates affect businesses? Lower interest rates generally make borrowing more affordable for businesses. Companies are more likely to invest in expanding production, research and development, and similar activities. However, while lending markets may loosen, businesses shouldn’t expect an immediate surge in venture capital investment.
- What’s the current outlook on unemployment? Despite positive news on inflation, the Fed has increased its unemployment rate projections. The end-of-year unemployment rate is now expected to reach 4.2% (up from 4%), and 4.4% for 2025 (up from 4.2%). This increase is partly attributed to new immigrants and recent graduates entering the workforce.
- What alternative funding strategies are suggested for businesses during this time? We emphasize the importance of focusing on unique R&D as a strategy for growth when traditional funding is tight. Both the US and Canada offer billions in innovation capital through R&D tax credits. These programs can help cover a significant portion of product development costs while making businesses more attractive for future investments.
