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Further FED rate cuts could become less likely and a pausing at current levels is now more justified as the surprising labor data released today showed the US economy added a strong 256k jobs in December, well above an expected 155k; the unemployment rate ticked lower to 4.1%. Equity markets fell with the S&P 500 and Nasdaq down 1.6%, at the time of writing.
Resin market participants and companies in our industry players banking on lower interest rates, after the FED started cutting in September 2024 totaling 100 basis points of cuts since its peak, may still face higher borrowing costs which makes holding inventory more expensive throughout the chain. Despite the FED’s cuts the 10YR Treasury yields recently rose to 4.75%, up over 50 basis points from December, which raises borrowing costs for businesses. US business had become accustomed to the ultra low 2010-2020 FED rate average just shy of 0.6% but looking further back to the 1990-2000 average near 5.25% was higher than the current target range of 4.25-4.5% which then appears more moderate.
It is generally thought that processor inventories are at very low levels and higher rates temper the desire to add volumes. Higher borrowing costs also lead to delayed or even the cancellation of capital investment projects like financing new equipment, adding manufacturing facilities, or acquiring other businesses. The FED initially raised rates to battle inflation but backing them off now responsibly has become a challenge amid strong US economic and labor markets.
The Fed Funds rate climbed to a target range of 5.25-5.5% before 3 cuts brought it back down to 4.25-4.5%. Based on FED governors December meeting rate dot plot forecast 2-3 cuts will happen in 2025, down from 4-5 cuts previously forecast in November. The next FOMC rate decision meeting at the end of January is likely to reveal reduced consensus among its governors regarding future rate cuts as outcoming data continues to change the expected economic landscape in addition to new voting members joining the committee this new year.
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