The Federal Reserve increased the interest rate by a quarter percentage point between 0.5% and 0.75%. According to Brian Holland, president and CFO of Fleet Advantage, higher interest rates have historically had a negative impact on truck demand. However, the underlying movement in interest rates is tied to an improving economy.
Late last year, the Federal Reserve approved its second rate increase in a decade, upping the interest rate by a quarter percentage point between 0.5% and 0.75%. So, what does that increase, though seemingly small, mean for private truck fleets and for-hire carriers going forward?
According to Brian Holland, president and CFO of Fleet Advantage, higher interest rates have historically had a negative impact on truck demand as the cost to finance equipment increases. However, the underlying movement in interest rates is tied to an improving economy, he noted.
“The GDP [Gross Domestic Product] numbers increased again, and the stock market is approaching all-time highs,” Holland explained. “These are indicators that businesses will continue to expand and their demand for trucks will increase.”
“Based on Fleet Advantage data analytics, we’ve determined that depreciation and interest represent a smaller percentage (26%) of truck costs compared to fuel (59%) and maintenance and repair (15%) costs,” he added. “By replacing older tractors with new highly efficient units, fuel and maintenance savings easily offset higher interest costs. In fact, a recent analysis of shorter lifecycle practices proves a significant fuel cost savings, particularly on a three-year replacement strategy. And while rates are marginally higher, they are still close to historic lows.”
So, to offset those higher interest costs, Holland recommends businesses evaluate the total cost of their fleet operation.
On the heels of its meeting in December, the Federal Reserve’s Open Market Committee said this month it received information that indicates the labor market has continued to strengthen and that economic activity has continued to expand. However, while inflation has increased in the past quarters, it is still below the 2% longer-run objective.
The committee reports it expects economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will rise to 2% over the medium term. But for now, because of labor market conditions and inflation, the Reserve will maintain the target range for the federal funds rate at 0.5% and 0.75%.
“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” according to the Federal Reserve. “However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
Going forward, Holland told Fleet Owner that as the economy continues to improve, successful fleets “must innovate to overcome the hurdles of higher interest costs.” He added that future trends present a strong argument for fleets to act now in acquiring new equipment.
Holland also noted that the days of low fuel costs may be behind us as OPEC and other non-affiliated members have acted together for the first time to increase fuel prices. And, with tractor sales off 34% from 2015, Holland suggested fleets take advantage of the opportunity to negotiate with dealers and manufacturers.