Interest Rates' Powerful Impact on Freight Demand
One of the most significant forces shaping freight demand is the Federal Reserve’s interest rate policy. In recent times, March 2022 to be exact, the Fed adopted a restrictive monetary approach, aggressively raising interest rates to combat inflation. This policy remained in place for 31 months before the Federal Reserve began easing rates in September 2024.
While these actions aimed to stabilize prices (combating inflation), they’ve also created ripple effects across the economy, influencing key drivers of freight demand such as consumer spending, business investment, manufacturing activity, and international trade. Let’s take a closer look at how interest rates affect each of these areas and, in turn, freight volumes.
Consumer Spending and Borrowing Costs
Higher interest rates increase borrowing costs for consumers, affecting loans for homes, cars, and credit cards. This reduced borrowing capacity often leads to lower consumer spending, especially on big-ticket items that are typically transported by freight. When consumers cut back, retail inventories shrink, and freight demand decreases as fewer goods are shipped to replenish stock.
Business Investments in Equipment and Facilities
Businesses also feel the pinch of rising interest rates. Higher borrowing costs make it more expensive for companies to invest in new equipment, expand facilities, and upgrade supply chains. This reduction in capital expenditure can suppress manufacturing activity (see below), a critical driver of freight volumes.
Additionally, businesses may scale back production due to anticipated lower consumer demand, further reducing freight needs. The Fed follows capital spending in a number of different ways because its governors understand the importance of these investments to the country’s economic health.
Manufacturing Activity
Manufacturing is one of the largest contributors to freight demand, as shipping is required for both components and finished products. When interest rates rise, manufacturing output often slows as businesses struggle with reduced demand and tighter financial conditions.
Sectors like automotive, heavy machinery, and construction materials are particularly sensitive, as their products often rely on financing and are directly tied to consumer and business investments. The US Institute for Supply Management (ISM) Manufacturing Purchasing Managers' Index (PMI) - ISM PMI for short - is a tool used to measure manufacturing activity in the US.
International Trade and Currency Strength
Interest rate policies affect international trade by influencing the value of the U.S. dollar. Higher interest rates generally strengthen the dollar, making U.S. exports more expensive and less competitive globally. This can reduce the volume of goods being exported, lowering freight demand associated with international shipments.
Conversely, a strong dollar may boost imports, potentially offsetting some freight volume losses. But this balance depends on global economic conditions and trade policies.
Housing Market and Construction
The housing market is highly sensitive to interest rates, as mortgage rates rise in tandem. Higher borrowing costs can cool housing demand, leading to slower construction activity. Since construction materials like lumber, steel, and concrete represent a significant portion of freight volume, a decline in construction projects directly reduces freight demand in this sector.
Housing punches above its weight when it comes to freight because of all the additional purchases home buyers make once they move into their house, like furniture, appliances, decor, and more. It's a package deal that's great for freight volume.
Agricultural Sector
Although agriculture is less immediately impacted by interest rates than other sectors, higher costs for financing equipment, storage, and transportation can still ripple through the supply chain. Farmers may reduce planting or harvesting volumes, which can impact the freight market for agricultural goods.
Navigating the Ripple Effects of Interest Rates on Freight Demand
Interest rates are a powerful economic lever with far-reaching implications for freight demand. From consumer spending to international trade, manufacturing activity, and housing, each sector responds differently to shifts in borrowing costs and economic conditions.
But even with those differences, it's clear that when those responses lead to changes in production levels, it directly affects freight volume. The Federal Reserve’s restrictive monetary policy since 2022 has underscored the interconnectedness of these factors, creating both challenges and opportunities for the freight industry.
For shippers, carriers, and logistics providers, understanding these dynamics is critical. Anticipating how interest rate changes influence key sectors allows businesses to adapt strategies, mitigate risks, and identify growth opportunities. While the recent easing of restrictive policies offers hope for a more stable economic environment, the freight market will continue to reflect the broader economic landscape.
As businesses prepare for 2025 and beyond, staying informed about the ripple effects of interest rates will be essential. By leveraging economic insights and closely monitoring industry trends, companies can make data-driven decisions that foster resilience, drive growth, and ensure success in an ever-evolving freight market.
By preparing now—optimizing operations, investing in technology, and building strategic partnerships—freight providers and shippers can position themselves to capitalize on the recovery when it arrives.
Staying informed and proactive is essential. The freight industry is resilient, and with the right strategies, both providers and shippers can navigate the current challenges and emerge stronger when the market rebounds.
For more information about InTek, or logistics and supply chain issues in general, check out our Freight Guides.
