25 March 2024 Central Bank Sticks to Interest Rate Cuts

Full Disclosure:​

Central Bank Sticks to Interest Rate Cuts​

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What you need to know for your interviews:

Think of the Federal Reserve as the money boss of the US economy. It’s in charge of deciding how much money should be circulating in the economy. If there is too much money chasing too few goods, prices go up, which is what we call demand-pull inflation. If there’s something that impacts the supply of goods, like a war or a shock to the supply chain, we call this cost-push inflation.

Why don’t we like inflation? Put very simply, if the prices of things go up, and salaries don’t also go up, my money is worth less. If I can’t buy the same amount of things because prices have gone up, I suffer.

Now, central banks have tools to combat inflation. Increase the interest rate and people will spend less and save more. Less spending should mean there is less money chasing goods, so prices should fall. Many central banks tend to aim for a target of 2% inflation.

But these effects are also the reason we complain about high interest rates. It’s expensive for people to borrow money. The same applies to businesses; I don’t have much incentive to buy another company or invest in a new project when it’s expensive to borrow money, I’m worried about the impact of inflation, and I disagree with the seller on the valuation of companies.

This brings us to today’s story. When the Federal Reserve meets and makes a statement, the market reacts - either positively or negatively. Usually, it’s based on expectation; if I’ve seen the recent inflation data, that US inflation rose from 3.1% to 3.2%, I think, ‘Oh no! Maybe the Fed won’t cut interest rates so soon’. The fact that they stuck with the decision makes me feel more confident about the state of the US economy and the Federal Reserve’s confidence in the economy. I get excited about the future and invest my money, which is why the stock market rallies in response. Investors are now expecting a cut to interest rates in June.

What does this mean for law firms?

High interest rates, inflation and the economic uncertainty led to 2023 being the slowest for M&A since 2013. Private equity dealmaking was also down 30% compared to 2022.

M&A is a big driver of revenue for the biggest law firms. It can be one of the biggest decisions in a company’s lifespan or the key way a business makes money (see private equity). These companies spend a lot of money on legal advice. Plus there is all the ancillary work: tax structuring, raising finance, competition clearance, compliance with employment regulation, and more. A rosier economic picture promises a return to dealmaking, which is good news for law firms.

But which law firms topped the charts for M&A deals, even despite the slowdown? According to the London Stock Exchange Group, Kirkland led the rankings for deal value at $397bn from 644 deals, followed by Latham. Freshfields was the highest-ranked non-US firm, while Goodwin Proctor led the charts for advising on the highest number of deals (871).