| Interest rate cuts generally encourage business investment for two reasons. 1. Interest rate cuts make equity investment more attractive. Equity investment is riskier than making loans (buying bonds) or cash (money markets, CDs). Investors do it anyway because equity pays a risk premium: equity returns tend to be higher than the return on cash or bonds. Example: Today, a hypothetical venture fund might offer a 10% expected return, and a hypothetical money market might offer 6%. So, you could make 4% more by investing in a VC fund. That's nice, but not necessarily worth the risk. But if interest rates are cut and everything else stays equal, the money market APR might drop to 4%. Now you can make 6% more by investing in the venture fund, which makes it more attractive to investors. 2. Reduced interest rates encourage businesses to spend money. Lower rates make it cheaper for them to borrow money, which means they can justify spending money on projects which would be unattractive when interest rates are high. If your revenue comes from other businesses, such as through B2B sales or through advertising, this may make them more likely to spend money with your company. Obviously, lower interest rates aren't going to bring customers to your door -- you'll still need to fill your own sales pipeline. But it may make it more likely that your customer will pull the trigger and close the deal. |