Why This Interest-Rate Cut Matters

The news was expected, but still made big headlines. And why not? The first cut to interest rates since 2020—announced this week—means that prices for both homes and everyday items just got a little more affordable. Consumers will see other benefits, such as lower rates on any loans they take. And of course, stock-market investors are generally welcoming the news as well.

But for companies, the half-point drop may play out a little differently—with some possible twists.

Many expected the 50 basis-point rate cut, and the stock market's reaction was muted after the Fed's announcement. The Fed’s hope is that lower interest rates, along with declining inflation, will instill confidence in consumers to start spending again and create some end-of-year momentum for the economy. The only question now is: Will it work? If it does, “companies can start to refocus on growth,” says Christian Hasenoehrl, global account lead in the Consumer and Industrial practices at Korn Ferry.

Hasenoehrl says that companies, which have been cutting costs for the last 18 months, want to be positioned for when the consumer comes back. He expects leaders to start spending again as well, taking advantage of lower borrowing costs and cheaper prices for goods and services. Investments in innovation and operations that were halted or slowed, like factory and warehouse upgrades and new-product development, could start picking up again, he says.

Korn Ferry’s North America president Radhika Papandreou agrees, adding that deal activity could spike as interest rates start coming down. So far this year, the news on mergers and acquisitions has been mixed, with dollar values up but the number of deals down. Most of the deals, however, were paid for with cash or private credit, meaning buyers didn’t have to borrow debt at high interest rates. Papandreou expects lower interest rates to bring private equity and other buyers off the sidelines. “There’s a lot of dry powder waiting to be put to work,” she says.

But experts caution leaders against moving too aggressively. For one thing, there is still the major question of when, and to what degree, consumer spending will rebound. “Firms need to think hard about that,” says Papandreou. To be sure, while some retailers and consumer-goods companies reported strong quarterly results, others came in mixed or weak, leaving investors to wonder if the environment is changing, or if some companies are just outperforming others.

Chad Astmann, co-head of global investment management at Korn Ferry, notes that interest rates usually decline faster than they rise, so you don’t want to refinance or borrow too much too soon. Speculation is already mounting that interest rates will be cut further next year. Between that and what is expected to be a closely contested US presidential election in November, Astmann thinks leaders will wait until 2025 before making any big moves. “Leaders will likely want to gauge the cadence of cutting and wait for rates to bottom out,” he says, adding that investments will likely be limited to artificial intelligence and other priority areas “where companies can’t afford to fall behind.”

With so much still uncertain, one area where companies are likely to remain cautious is hiring, says Hasenoehrl. Consumers and growth need to come back before hiring does. Or, as Hasenoehrl puts it, hiring won’t start increasing until “later in the cycle.”

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