by Zain Jaffer
No one has a crystal ball, including me. But I think there are some things we can assume to probably be true.
One is that the Democrats and the Biden administration wants to win a second term and control the next Congress. However there are many political issues working against them that are discussed in many news reports and discussion groups like the Afghanistan withdrawal, the border with Mexico, the situation with crime and homelessness in many major cities, Ukraine aid, and others need to be improved in their favor before the November 2024 elections.
One major issue that they need to deal with is the impact of high interest rates on the economy.
Although the Fed is an independent body that should act independently of what the White House wants, we should probably assume that Fed Chairman Jerome Powell feels some heat for the high interest rates that have affected everything from mortgage rates, car loans, credit card bills, treasury bond rates, even the stock market.
It is speculation to say if he caved in, but Powell did say in his mid December 2023 press conference that the tightening of monetary policy is likely over as inflation falls faster than expected and with a discussion of cuts in borrowing costs coming into view [See https://www.reuters.com/markets/us/fed-likely-hold-rates-steady-signal-couple-cuts-2024-2023-12-13/]. This was a sudden turnaround from his more hawkish pronouncement that talk of cutting rates was premature just two weeks earlier.
However we are probably not looking at rates near zero similar to what we had in 2021. Those good old days of cheap debt are probably over, else inflation may come roaring back. The cup half full advocates probably wish for that to be true, but the realistic view is to probably assume that there will no longer be more rate hikes, but any cuts may be slow and tempered.
In any case, any interest rate cuts in 2024, even if not to the level of going back to 2021, will still result in a resurgence of money going back to the stock and crypto markets. It will likely lead to more people going ahead with their home purchase plans, and discretionary spending plans, assuming they have the money and income. No one knows if that is good enough to bring us out of a possible economic slowdown, but the Democrats and the White House just needs to show that the economy has improved under their watch in 2024 prior to the elections.
FOR BUSINESSES AND INVESTORS
Although lower interest rates coupled with more quantitative easing (expansion of the Fed balance sheet) will lead to more liquidity or money into the economy, the actual impact will depend on how much the Fed cuts and eases.
However companies and entrepreneurs will definitely welcome cheaper debt. Real estate developers for example are unable to continue with many projects that need to be renegotiated at high interest rates and are hoping for a rate cut. Lower mortgage rates, car loans, credit card bills, may improve household and individual discretionary spending budgets, which will be good for companies that make products that are more desirable than necessary like Apple iPhones.
Lower rates will make fixed income instruments and money markets less attractive and may bring back money into the stock markets, thus giving companies access to equity capital.
Coupled with cheaper debt and more equity buyers, companies and businesses may be able to position and expand as consumers are able to spend more.
NONPROFIT FINANCING
At the end of the day, what does that all mean for nonprofit financing?
Generally speaking when business is good, and corporations are reaping good profits, they are more inclined to support charitable contributions and nonprofit “save the world” type of work. There are tax breaks that accrue from being generous donors, aside from the public relations benefit it brings.
However in bad years, when there is barely any revenue to be had, and income statements are bleeding in red, there is no tax to save on. Corporate donations and contributions may go down.
What does this mean? It means that nonprofits have to tighten their belts and be more creative in reaching out to their typical donors, particularly corporate ones.
Again it really depends on whether the Fed acts to make 2024 a better economic year for the Democrats and the White House. We can only all hope for the best.