The Cost of Capital for Engineering-Construction Firms Dropped In Spite of Rising Fed Rate

A lot has been made recently about how an increasing Federal Funds Rate is elevating interest rates in general, making it more costly to finance purchases. While that may be true for the economy in general, the cost of capital for engineering-construction firms actually decreased year-over-year while the Fed Rate increased. 

While to cost of both debt and equity lurched upward in lockstep with the Fed Rate between January 2022 and 2023, both the cost of debt and equity (and, in turn, the cost of capital) decreased between 2023 and 2024 while the Fed Rate increased. Why does this matter? Well, the cost of capital, which is a function of the cost of equity and debt, is the hurdle rate for justifying a capital investment. The higher the cost of capital, the more an investment needs to return in order to validate itself. The curve for the cost of capital mimics the Fed Rate, albeit with a 6%+ premium. One would expect that as the Fed Rate increases, so would the cost of capital. And that was the case for the previous 12 years. However, this year bucked the trend, and the costs of debt, equity and overall capital decreased even though the Fed Rate increased. This should make it easier for engineering-construction firms to invest in capital equipment, mergers and acquisitions, or other investments.