Tuesday’s surprising 75 basis point cut of the federal funds rate (from 4.25% to 3.50%) was the largest inter-meeting decrease since 1982. On August 16, 1982, the Federal Open Market Committee voted to slash the federal funds rate by 100 basis points — from 11.25% to 10.25%.
The last inter-meeting rate cut was on September 17, 2001, in response to the attacks on the World Trade Center. At that time, Greenspan & Co. cut the federal funds rate only by 50 basis points, from 3.5% to 3.00%.
And while the news of this most recent rate cut has disrupted world markets and has economists speculating about recession, some finance chiefs are finding a silver lining to the announcement. “Within our company, things are stronger than ever … And yet, around us, the financial markets are seemingly in collapse at the moment,” noted the CFO of a small-cap software company that asked not to be identified.
The company, based in the UK but with offices in the U.S., generates about 40 percent of its revenues in America. News of the rate cut came while the CFO was in California holding staff meetings. “We have a situation with confusion reigning in the marketplace. Our message to the troops is, to a certain extent, forget the markets. All you’ve got to do is focus internally. Our cash, revenue and profit is growing,” he told CFO.com.
Further, he said that in some ways, the rate cut made his job easier. Indeed, the gloomy message is so loud, that it makes his message to employees crystal clear: Focus on your job and fight off complacency. “When times are good, you often have to really work hard to rein in the enthusiasm of employees. When you have something like this, it makes it easier to deliver the message of no complacency, focus, execution,” he asserted.
The rate-cut announcement will also affect the executive suite and boardrooms. He expects that senior managers and directors will think twice about big capital expenditures and new hires. And, “that’s not always a bad thing.” What’s more, companies will reevaluate real estate and M&A decisions. For example, he plans to delay the lease of extra office space until the markets settle down.
Somewhat counter-intuitively, he’s eager for more bad news about the sputtering U.S. economy. “Hopefully over the next few months we’ll see masses and masses of bad news. That will wash it out of the system … That needs to happen before there’s any hope of rebuilding.”