'Aggressive' Fed rate cut could help industries raise capital for digital transformations

In the case of manufacturing IT and OT, a higher tide might raise all ships? That theory could be put to the test by C-suite executives and their CIOs, CISOs, and plant engineers who like everyone else in American business saw the U.S. Federal Reserve aggressively cut its key lending rate on Sept. 18, lowering borrowing costs and potentially boosting capital budgets for production line and industrial technology investments.

The lowering of the U.S. benchmark, a widely expected move after months of falling inflation and a weakening job market, is bound to increase positivity among executives about their companies’ outlook—and have the additional benefit of spurring borrowing and increasing the likelihood that manufacturers will increase budgets in 2025 for projects associated with digital transformation.

That moods probably would brighten was the general consensus among sources whom Smart Industry and IndustryWeek interviewed following the big news last Wednesday of the large Fed rate slash.

Many also did not hesitate to ruminate on what lower borrowing rates would do to capital investment, which for SI’s audience means spurring spending on technology and making their companies more likely testbeds for digital transformation.

“I tell my clients that there is never a bad time for a company to invest in their own efficiency and reliability,” said Heath Stephens, digitalization leader at Mobile, Alabama-based Hargrove Controls + Automation, a controls and automation consultancy. “Even when higher interest rates make large capex projects unattractive, smaller investments in digital transformation can have lasting financial impacts.”

He added: “However, lower interest rates make capital cheaper and often spur projects because of general increases in capex activity to support growing sales and entry into new markets. Lower interest rates also generally mean higher profits and higher stock prices. We welcome a lower interest rate environment and all the investment that should bring. The only time better to invest in digital transformation technologies than today was yesterday!”

The Fed’s move in detail

Policymakers voted 11-to-1 in favor of lowering the central bank's benchmark rate to between 4.75% and 5%, the Fed announced in a statement. They also penciled in an additional half-point of cuts before the end of this year, and an added percentage point of cuts in 2025.

“It is time to recalibrate our policy to something that is more appropriate given the progress on inflation, and on employment moving to a more sustainable level,” Powell told reporters after the decision was announced. “This is the beginning of that process.”

The Fed said its rate-setting committee “has gained greater confidence” that inflation was moving toward its long-term 2% target.

It added that “the risks to achieving its employment and inflation goals are roughly in balance.”

The bank has a dual mandate from Congress to act independently to tackle both inflation and employment.

Video: Moving the shop floor toward digital manufacturing

In updated forecasts published alongside the Fed's rate decision, policymakers' median forecasts pointed to an unemployment rate of 4.4% in the fourth quarter of this year, up from 4% in the last update in June.
They also penciled in an annual headline inflation rate of 2.3%, slightly lower than in June.

Cheaper money but not a panacea

The rate cut was widely expected, and some observers think there may be two more cuts by the end of 2024, so money might be getting even cheaper, said Dan Cakora, pricing economist at Vendavo, a vendor of pricing software that supports price forecasting.

“Because of this, manufacturers might hold off on major decisions while they wait to see how the election and more potential 2024 rate cuts affect the market before deciding on their path,” Cakora added, advising: “Remain vigilant and prepare to act decisively once the direction becomes clear."

However, Ryan Martin, senior research director for industrial and manufacturing at ABI Research, noted that lack of money isn’t what’s holding manufacturers back; workforce issues are.

"About 70% of digital transformation projects are challenged to kick off due to limited time and expertise,” Martin said, “and 50% of the biggest challenges for a successful implementation are around people issues, rather than simply technology issues. The implication is that manufacturers still need to prioritize partners with a strong implementation and support offering to bring people closer to the problems they’re trained to solve.”

Martin also added that rate cuts are “a signal that may ease minds and on the high end of scale for capital investments and drive some decisions. But generally, it will be business as usual for most.”

Smart Industry Editor-in-Chief Robert Schoenberger, IndustryWeek Senior Editor Laura Putre, IndustryWeek Senior Editor Dennis Scimeca and IndustryWeek Associate Editor Anna Smith contributed to this report.