The Story
Last week, the Federal Reserve announced it was reducing interest rates by a quarter-percentage point. It’s the first time the US central bank has cut rates since the 2008 financial crash.
Impact on Businesses and Law firms
It might seem strange that the Fed is cutting rates even though the US economy is doing well. There are two reasons for the Fed’s pivot.
First, interest rates are being used as an insurance policy, a pre-emptive step to cushion the economy amid growing trade tensions and slowing growth. It was well timed; the next day, Donald Trump extended tariffs to almost all Chinese imports, and this week, branded China a ‘currency manipulator’ after it allowed its currency to fall below 7 yuan to the dollar.
Second, the central bank has been struggling to overcome persistently low inflation. The US fears it will suffer the same disease that has led the European Central Bank and the Bank of Japan to take extraordinary actions. In this case, cutting interest rates aims to bring the rate of inflation closer to the Fed’s 2% target.
Following the latest actions by Trump against China, it is expected that the Federal Reserve will continue to cut rates further. That means reduced borrowing costs for many companies, although any benefits must also be balanced by the costs of the escalating trade war and the risk of a future recession.
Law firms are also impacted by interest rates. They are businesses, which make money by charging clients for the legal services their lawyers provide. Different firms run their businesses differently. For example, the likes of Herbert Smith Freehills and DWF relied on a relatively high amount of debt to fund their costs and expansion plans in 2017/18. Compare that to the magic circle firms, with four out of the five borrowing nothing between 2014 and 2018.
By Jaysen Sutton
