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Trucking caught in crossfire of Fed’s war on inflation

Rate hikes may double down on truckload demand declines in 2023

Photo: Jim Allen - FreightWaves

Chart of the Week: Fed Funds Rate, Outbound Tender Volume Index – USA SONAR: FEDFUND.USA, OTVI.USA

The Fed raised interest rates another 75 basis points (0.75%) on Wednesday, which will more than likely support the continuing decline in trucking demand that started in early March. The national Outbound Tender Volume Index (OTVI), which measures requests from shippers for truckload capacity, has an inverse correlation with the federal funds rate — as one goes up, the other comes down. Truckload demand has been at its highest levels while interest rates have been close to zero. This correlation is somewhat coincidental but definitely not disconnected and predicts a sharper decline in volumes is yet to come.

The primary purpose of the Federal Reserve is to ensure economic stability by keeping prices stable and maximizing employment. Inflation has been above what the Fed views as acceptable — ~3% — since the start of the year, causing it to raise interest rates at a historic pace starting in March. 

While stabilizing prices and maintaining full employment may be a mutually exclusive endeavor at the moment, the Fed views inflation as the priority. 

The main purpose of raising interest rates is to subdue demand, primarily for goods. While the interest rate increase only directly influences the interbank rate or the rate at which banks borrow from each other to meet reserve requirements, it is also the basis for other interest rates that influence just about every other form of financing and savings account in the U.S. 

Banks essentially use the funds rate as a cost basis for every other offering all the way down to personal loans and credit cards. The difference between the funds rate and the offered loan rate is how the banks fund their operation and make money. So when the interest rates increase, so do other rates in general. 


The increasing cost of borrowing money means companies have to spend more on financing large purchases. Most companies do not carry large amounts of cash since their main purpose is to increase in value, which cash loses over time — thanks to inflation. 

The bottom line for trucking

As financing costs increase, fewer purchases are made by businesses and consumers — meaning fewer goods are transported.  

Here is where things get messy. While the Fed has clearly stated it means to fight inflation until the job is done, this message assumes it is the Fed’s job alone to fight inflation. The tools of the Fed are all demand-side influences — money supply, interest rates and a few other tools that encourage or discourage spending. 

Anyone involved in supply chain management or transportation knows that most of the current inflation is supply side induced. Things like difficulty sourcing transportation capacity, production disruptions and cost of labor increases have all pushed the supply curve inward. Many of these items are in a state of correction as this article is written.    

Trucking rates in correction  

Looking at the OTVI, there was a 19% drop in truckload demand over the course of five weeks starting in March, before the Fed started raising interest rates. This drop has pushed truckload spot rates excluding fuel from a point where they were 63% higher than pre-COVID levels to a current value of 17% over September 2019. 

Truckload contract rates take longer to move and have just started to drop over the past few months. The historic relationship between spot and contract rates suggests they will fall at least another 14% — if demand remains stable. 

Lagging impacts

The problem is that interest rate changes take about 12 months to fully hit the economy, which means we are still six months away from the first rate increase being felt fully. Most trucking indicators and recent reports from companies like FedEx show that demand is already falling rapidly without the help of interest rate increases — suggesting that the Fed actions may show up at a time when the economy is in need of stimulation. 

The Fed has admitted misunderstanding economic environment in recent years, drawing criticism from many experienced economists and former members. I know at least one economist who did not dismiss inflation as transitory last year and it was probably due to his immersion in supply chains and transportation. 

The Fed of course has to look beyond near-term pain and individual sector interests to make the best decisions for the overriding health of the economy — no small ask — but recent history suggests its understanding of the current environment may be murky and trucking companies should brace for deeper drops in demand.

About the Chart of the Week

The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week a Market Expert will post a chart, along with commentary, live on the front page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.

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5 Comments

  1. Lute Diaz

    As the intrest rates rise and we go deeper into recession companies are dropping like flies. The demand is stable but the rates keep dropping. Like the other guy said “ there should be a bidding war”. There isn’t because you don’t take into account the greed of the middle man. He still has to cover an overhead at the expense of the driver. Two years ago everyone said prices at the store went up because freight rates went up because of driver shortage and fuel. All has started to drop yet the consumer and the trucker are getting the short end. Large trucking fleets with brokerage firms offer loads at 1.5 to 2 dollars a mile. Put it on your truck. I guarantee your boss will slap the back of your head as fast as you think it. So all the analytical stuff just doesn’t figure for good ole greed.

  2. Rich Witzel

    Freight prices would not be dropping if there was a shortage of drivers. Every single Spot Market Trucking Company will always tell you they need more Drivers. Their revenue stream requires a driver in a truck. That metric has nothing to do with the needs of the Market. If there are 500 loads in a city today and only 400 drivers……., there would be a bidding war. The Fed needs to stop trying to ad more drivers.

    1. Stephen Webster

      A number of trucking companies say they cannot afford 10 to 12 paid sick days or federal legislation to require them to cover the transport and medical care costs for sick or injured cross border drivers ont 🇨🇦 . They are bringing cheap foreign drivers while small trucking companies and farmers can afford insurance to train and hire new people for lower risk rural parts of ont. I am seeing rates for north bound return loads to ont at twice the cost of fuel and tolls.

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Zach Strickland, FW Market Expert & Market Analyst

Zach Strickland, the “Sultan of SONAR,” curates the weekly market update. Zach is also one of FreightWaves’ Market Experts. With a degree in Finance, Strickland spent the early part of his career in banking before transitioning to transportation in various roles and segments, such as truckload and LTL. He has over 13 years of transportation experience, specializing in data, pricing, and analytics.