Federal Reserve rate cut seen as positive for private equity market

Investing.com -- Scott Merkle, the managing partner of SLB Capital Advisors, has shared his insights regarding the Federal Open Market Committee (FOMC) meeting scheduled for later today. According to Merkle, a 0.25% cut to the Federal Funds rate is widely anticipated.

This potential rate cut is not remarkable in itself, but rather its timing and circumstances are noteworthy. The Federal Reserve had the option to defer the rate cut following an increase in inflation for November. Additionally, comments made by Chairman Powell in early December indicated a robust economy, suggesting a more cautious approach could be warranted.

However, the upcoming change in administration, known for its preference for lower rates, presents an opportunity for the Federal Reserve to reduce rates on its own terms. This preemptive move could prevent the appearance of succumbing to White House pressure when the next opportunity for a rate cut arises in 2025.

Merkle also pointed out that a rate cut would be advantageous for private equity. Lower rates could facilitate the financing of leveraged buyouts (LBOs) and stimulate transactions in the currently favorable market conditions. The sale leaseback market, which has a correlation with M&A, would also likely benefit from a rate reduction.

Merkle acknowledged the challenge of interpreting "Fedspeak", or the Federal Reserve's communication. He suggested that the decision to cut the rate might be a simple matter of arithmetic. The year 2024 began with the Consumer Price Index (CPI) and related figures consistently above a 3% annual rate, while the year is ending with these figures consistently below 3%.

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Source: Investing.com