In its latest November meeting, the Federal Reserve implemented its second interest rate cut of the year, lowering the federal funds rate by 0.25 percentage points to a range of 4.5% to 4.75%. With inflation nearing the Fed’s target at 2.1%, this move signals a continued focus on fostering economic stability and growth amidst a complex macroeconomic and geo-political environment.
But rate cuts don’t happen without reason, with many executives looking forward to turning the page on what has been a difficult year. It’s no surprise that one of the catch cries for this year has been ‘stay alive until 2025.’
For CFOs and finance professionals, it’s serious business, and the Fed’s policy shift presents both opportunities and risks. Lower rates unlocks the potential for lower borrowing costs and new options for strategic capital deployment, but an uncertain backdrop means that pulling these growth levers can come with increased risk.
In this article, we look at the Fed’s decision and its implications, along with actionable strategies for treasury and finance teams faced with challenging conditions.
The Finance Team’s To Do List
Rate cuts often cause a short term rally in stock markets on the potential for cheaper capital for companies, improved cashflow for household budgets, and the flow on impact to growth prospects for businesses.
There are a number of specific areas that finance teams should review to take the best advantage of these changes. Here are some of the specific items that should be on every CFOs to do list:
Debt planning
The Fed’s rate cut offers an immediate benefit in the form of reduced borrowing costs. Companies can take advantage of lower corporate borrowing rates to secure cheaper credit lines, refinance high-interest debts, or fund growth initiatives. This presents an opportune time to review financing structures and renegotiate terms with lenders.
However, any review here should be considered in the context of the broader rate cycle. Locking in long term funding rates might save money now, but could look expensive in the future if rates are cut further.
Capital deployment strategy
As rates fall, executives will need to consider how they are deploying capital. Not only will it be cheaper to access debt, but the opportunity cost of holding excess cash reserves will increase as the returns on corporate savings drop.
Low-cost borrowing or dormant capital can be channeled into many different places, such as:
- Expansion initiatives such as acquisitions, new markets, or product launches.
- Operational upgrades, including investments in automation, digital tools, or infrastructure.
- Debt refinancing, prioritizing the repayment of higher-interest obligations to free up future cash flow.
Liquidity management
Surplus cash is less of an issue when it is generating an attractive rate of return. That’s particularly true in recent months, with inflation falling well below the Fed rate, meaning cash deposits and other fixed income products have been offering positive real rates of return. That’s something we’ve not seen in some time.
While this relationship is still holding, the margins are likely to continue to narrow, meaning now is the time for CFOs and treasurers to review their investment strategies. Treasury teams should consider adjusting liquidity strategies to balance the cost of holding cash with potential investment returns.
Risks to Monitor
As we’ve alluded to, this rate cut may not be the last in the cycle. There’s plenty of uncertainty on the horizon, and finance teams need to look outwards to forecast not just what the Fed might do about rates for 2025, but why they may make those decisions.
Here are some of the key risks to monitor in order to stay ahead of the situation:
Election uncertainty and policy risks
Any time there’s a change in administration in the White House, we can expect to see a degree of uncertainty. With the Trump administration preparing to assume office, policy changes could add volatility to the economic landscape.
For example, proposed tax cuts and tariffs may drive inflationary pressures, creating a challenge for the Fed to fuel economic growth without a spiral back into high inflation.
Scenario planning can be a very useful technique here, giving finance teams the ability to forecast their financial position using a range of different assumptions. From here, teams can develop contingency plans.
Credit availability
We talked about access to cheaper debt above, but it comes with a major caveat. If economic conditions deteriorate, lenders are likely to tighten their lending criteria in order to minimize their own risks. This could affect the availability and terms of corporate financing, particularly for businesses with weaker credit profiles.
In fact, rates are often at their lowest when economic conditions are at their worst, creating a catch 22 situation for finance leaders. CFOs should look to plan their need for capital in the short and medium term, and consider the trade-off of securing credit lines at higher rates, with the chances of securing them in the future.
Currency volatility
Rate cuts can weaken the dollar, impacting businesses with significant international operations or reliance on imports. But currency fluctuations are complex, and many other factors will also come into play.
Currencies also don’t rise and fall as a monolith. The US dollar could simultaneously rise against the Euro while falling against the Yen. This makes it important for treasury teams to evaluate their own specific exposure to currency fluctuations and consider hedging strategies to mitigate foreign exchange risks.
Actionable Strategies for Treasury and Finance Teams
A single rate cut doesn’t create the need for a drastic overhaul of finance strategy. But it does make sense to make some adjustments and start considering future scenarios. Here are some strategies treasury and finance teams should consider over the coming months:
Adjust cash flow forecasts
Obviously, forecasts are based on assumptions, and these need to be regularly updated based on real data. Now’s the time for finance teams to reassess their cash flow forecasts to reflect changing interest rates and borrowing costs.
It can also be useful to incorporate potential changes to financing strategy as a result of lower borrowing costs, as well as adjusting for and any anticipated shifts in investment returns.
Scenario planning
As mentioned above, scenario planning is a powerful tool for navigating uncertainty. Finance teams should develop scenarios that account for potential inflationary pressures stemming from tax policies or tariffs, as well as the changes to debt availability if needed.
It may also be beneficial to change assumptions on sales and costs, should there be a reduction in consumer spending as a result of economic issues, or higher costs due to tariffs or other supply chain pressure.
Using these models can help you understand how rising costs could affect margins, pricing strategies, and overall liquidity needs.
Proactively monitor financial markets
While this may be a given, it’s important to mention nonetheless. CFOs and treasurers should stay updated on financial market trends, interest rate forecasts, and credit conditions. The big picture is important, but arguably even more so is the microeconomic conditions of your specific industry or geographic area.
Finding opportunities and managing risks
The Feds November rate cut offers a mix of opportunities and challenges for treasury and finance teams. By leveraging lower borrowing costs, deploying capital strategically, and optimizing liquidity, companies can manage risk, but also position themselves to take advantage of growth opportunities that might arise.
Treasury and finance professionals who prioritize adaptability, scenario planning, and active market engagement will be best positioned to navigate these shifts. To explore how Trovata’s real-time cash visibility and data management tools can support your team in adapting to evolving market conditions, book a demo today.
