When it comes to interest rates, keep the bigger picture in mind

In many ways, 2024 has been a year of anticipation. For much of the year, companies were holding back decisions on capital expenditures, awaiting clarity on when and how drastically the Federal Reserve would begin dropping interest rates, what voters would decide in the November elections and whether economic data points would continue to show strength.

Top leaders from The Alta Group offered insights on how to keep these various economic dynamics—particularly interest rates—in perspective in an article that appears in the November-December 2024 edition of the Monitor. Headlined, “Don’t Be Blinded by Interest-Rate Hype: What to Focus on as the Impact of Fed Rate Cuts Becomes Clearer,” the article offers ideas to help equipment finance leaders understand what may really drive the industry in the months to come, as well as advice on what to do now to be ready to hit the ground running when the economic picture becomes clearer.

Even now, after the election results are known and the Fed made its third consecutive rate cut Dec. 18, the article remains sound advice for how to maintain perspective when looking at the entire economic picture as it impacts equipment finance.

The authors—co-CEOs Valerie L. Gerard and Jim Jackson, Vice Chairmen Jim Merrilees and Rick Remiker, and Managing Director David Wiener—write that “interest-rate cuts can present opportunities, such as cheaper capital and increased equipment demand, and challenges, such as increased competition, for equipment finance firms.” They also point to other factors that could impact the downstream economy: a dip in consumer confidence, a near-term record surge in Americans reaching retirement age, and economic fallout from Hurricanes Helene and Milton.

What should equipment finance leaders be watching as we approach 2025? We will discuss this in greater depth in our annual Insights report in January, but three major dynamics discussed in the Monitor article are the role of banks, the impact of the new administration in Washington, and the momentum behind mergers & acquisitions activity.

Let’s look at banks first. They pulled back from their equipment finance activities in the wake of the Silicon Valley and Signature bank failures, with captives and independents picking up the slack, but now are inching back into the space. Perhaps that positive movement will accelerate if liquidity concerns abate further and banks pursue loan growth, but the Alta leadership thinks that process “will take some time to play out.” Nevertheless, “don’t dismiss the banks across the board,” they say: “While 25 of the 46 banks that completed the 2024 ELFA Survey of Equipment Finance Activity questionnaire reported a decline in year-over-year new business volume, 21 of the banks actually reported an average increase of 12.8% in 2023.”

The Alta principals also write that the new governing climate in Washington will impact equipment finance business in several ways. The Alta Group will offer a much more robust discussion of this topic in its 2025 Insights report, but the impacts include:

• When the corporate tax rate fell from 35% to 21% from 2017 to 2018, equipment finance businesses saw their tax liability shrink dramatically. Cutting that rate further would make that liability even smaller.
• Banking regulations could be loosened, and credit subsequently could become more available.
• Relaxed rules on emission and sustainability could affect equipment finance lending to energy, transportation and manufacturing businesses.
• While “higher tariffs would raise costs for businesses dependent upon imported machinery, potentially leading to higher financing needs,” tariffs might also boost demand and limit competition for U.S.-built equipment.

In the weeks since the article was written, the M&A picture has become more positive. The strong economy, paired with the prospect of a friendlier regulatory environment and lower corporate tax rates, should lead to increased M&A activity in 2025.

What’s less clear is the long-term path for inflation and interest rates, as the Fed in December signaled it would take a slower approach to rate cuts going forward, pointing to projections for inflation to be higher than initially anticipated in 2025.

So, what should equipment finance leaders do, in the face of this uncertainty?

First, the authors write, don’t lower your defenses. Preserve your margins. Consider diversifying your types and sources of capital.  Stay on top of your portfolio. Talk frequently with your customers. Provide good service.

Next, “dig deep into metrics,” such as how long customer service takes to resolve issues, and ask how you can innovate, or how long-term investments in technology could put the business in a stronger position when growth returns.

Don’t forget the customer’s demand for more intuitive digital experiences. Take a strategic approach to leveraging digital tools to transform customer interactions. This includes enhancing how customers engage online, streamlining processes and improving the overall efficiency and effectiveness of customer service.

Examine how AI can help you go beyond mere automation of routine tasks and help identify new ways to enhance the efficiency of the customer experience.

As the authors conclude:

“Opportunity is on the horizon, and those who can nimbly adjust their strategies and focus on technology-driven innovation, operational efficiency, customer service and identifying growth potential will be ready to pounce when capital expenditures ramp up.”

Read the full article here. To learn more about how The Alta Group can help position your equipment finance enterprise for success, contact us.

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