The Federal Reserve announcement Tuesday that it will seek to keep interest rates very low for at least the next two years, which could give transportation and other capital-intensive businesses stronger assurances to invest in equipment despite weaker ocean shipping demand.
The Fed action follows extreme upheaval in European bond markets and sharp declines in U.S. stock prices, capped by a 635-point drop Aug. 8 in the Dow Jones Industrial Average. Transportation stocks were particularly hard hit, since their business is closely tied to economic expansion. Stocks recovered some ground today.
Earlier, the Fed had used a vague phrasing of expecting to continue exceptionally low rates “for an extended period,” as it maintained a target rate for overnight loans between banks between zero and 0.25 percent. Now, it expects to keep rates that low “at least through mid-2013.”
But the policy change is also an admission that the economy is suffering from more than short-term headwinds, such as this year’s spiking fuel prices and the impact of Japan’s disasters on the supply chain.
“Indicators suggest a deterioration in overall labor market conditions in recent months . . . household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed,” said a Fed statement after a meeting of its policy-setting Federal Open Market Committee. Temporary factors, it said, “appear to account for only some of the recent weakness in economic activity.”
While the Fed’s policy directly affects only short-term interest rates, by committing in advance to a long period of heavy money creation it can also keep long-term rates from rising as much as they might otherwise.
That could be a cost-cutting boon to both freight shippers and their transportation carriers as they gear up. The Fed’s policy stance effectively guarantees that interest costs will remain low for heavy industries that invest in big-ticket plant and equipment, including factories, warehouses, rail and port infrastructure and the full range of freight transportation equipment.
Already, “business investment in equipment and software continues to expand,” the Fed said, so the new policy stance could bolster this important area of strength.