How Do Interest Rate Cuts Affect Municipalities?

Interest rate policy dictates much of what occurs throughout the broader economy. While many associate economic growth with private enterprise, municipal governments also feel interest rate cuts and hikes directly. 

The Federal Reserve increased rates throughout much of the past four years in an effort to cool rapidly rising inflation. Ultimately, their increasing of borrowing rates had their intended effect—inflation reduction. 

Overall, costs have risen a staggering 22.5% since February of 2020. Much of that jump occurred from the beginning of the coronavirus recession to the end of 2023. Since then, inflation has subsided somewhat, rising a modest 2.9% last year. 

With inflation less of a concern, the Fed began cutting interest rates in 2024. They instituted three consecutive rate cuts, reducing the Federal Funds Rate to 4.25%

This trend is likely to continue into the next four quarters, as the Fed stated they intended to make an additional two cuts in 2025. 

How does a lower interest rate affect municipalities?

When interest rates drop, state and local governments immediately see lower bowering costs. This reduction makes it easier to finance critical projects, like infrastructure upgrades, and invest in other long-term initiatives. 

In recent years, higher interest rates have deterred borrowing, delaying many needed projects. However, as rates decrease, this trend will likely shift. While a single rate cut may not immediately trigger a borrowing boom, it signals a potential return to more favorable conditions for project investments. 

These capital improvement projects can help a lagging country-wide infrastructure. 

According to the American Society of Civil Engineers (ASCE) Infrastructure Report Card, U.S. infrastructure is rated “C-” overall, highlighting the urgent need for capital improvements to avoid failures.

Municipalities are tasked with meeting citizen needs, and maintaining public infrastructure is a critical part of that duty. As interest rates continue to fall, it may be the perfect time to restart a long-needed infrastructure or asset project. 

Spillover effects on municipal economies 

Lower interest rates do more than just reduce borrowing costs for capital improvement projects. They can stimulate private investment and economic activity leading to potential benefits for municipalities. 

As borrowing becomes more affordable, consumer spending and business investments typically increase, driving up sales and corporate tax revenues. This potential uptick in tax revenue could help increase available funding for capital improvements and increase a municipality’s fiscal health. 

Why it’s time to rethink asset management software partnerships

With the potential for increased municipal revenue and the likelihood of project investment, it’s the perfect time to reassess your asset management software. 

Leading government fixed asset management software helps municipalities schedule asset maintenance, plan infrastructure improvements, increase citizen satisfaction, and drive revenue.

Poor asset management software could make potential projects fail. Conversely, employees leveraging leading government asset management software can more easily complete projects on time, reduce inefficiencies, cut costs, and increase community satisfaction.