Perc Pineda, PhD, Chief Economist, PLASTICS
November 04, 2025
The Federal Reserve cut the federal funds rate by 25 basis points at the Federal Open Market Committee (FOMC) meeting on October 28–29, 2025, bringing the target range to 3.75%–4.0%. This marks the second rate cut this year, totaling 50 basis points. Although the market is pricing in another cut before year-end, monetary policy is not on a preset course, as highlighted at the press conference held by Fed Chair Jerome H. Powell following the FOMC meeting.
The latest interest rate cuts by the Fed are a welcome development for the plastics industry, which has been affected by a prolonged slump in U.S. manufacturing partly driven by high borrowing costs.
Expansionary Policies Meet Tariffs
Currently, both fiscal and monetary policy have been shifting toward expansion. This year’s tax reform, which introduced 100% full expensing on capital expenditures, supports the manufacturing sector. The clear downward trajectory of interest rates provides additional policy-driven stimulus. However, higher tariffs have increased the cost of imported inputs and equipment for manufacturing, which raises the question: do accommodative fiscal and monetary policies truly help?
In theory, lower interest rates should spur higher investment spending, which in turn boosts income and likely leads to increased consumer spending. This feedback loop should push production curves upward across the plastics industry’s value chain. We observed a slowdown in plastics production when the federal funds rate reached 4.0%; however, monetary policy lags will influence how quickly lower rates translate into increased investment—particularly in plastics end markets—from compounding and tooling to full-scale production.
Policies Take Time to Hit the Factory Floor
The effectiveness of monetary policy, especially for manufacturing, depends on the speed of financial intermediation. Economic studies show that banks do not pass rate cuts through to their lending portfolios instantaneously, which is referred to as an implementation or transmission lag. For instance, Drechsler et al. (2022) found that when the Fed lowers interest rates, banks reduce lending by about 0.5%–1% to non-bank-dependent firms within 1–3 months, with full adjustment—including lower loan rates—taking six to nine months.1 Notably, it should be noted that the effectiveness of monetary policy is also depends on the pace of policy adjustment in relation to where the economy is in the business cycle.
Just as in monetary policy, fiscal policy also has time lags to consider. Beyond the decision lag by Congress alone, which can take anywhere from six months to two years, or even longer, the impact lag –when money finally reaches businesses and spend or invest and increases production – could take six months to 5 years. A case in point, the CHIPS Act for U.S. chip plants, an end market for the plastics industry, was passed into law in 2022 and grants were awarded in 2023-2024. Assuming plants the broke ground in 2025 – for first time or virgin investment – full output could be expected sometime 2027 to 2023. In short, the direct subsidy route of expansionary fiscal policy could have a five to eight year lag. However, the case of tax cut such as 100% expensing—when companies can write off new machines 100% in Year 1 in the TCJA 2017—the lag time is shorter. The law was passed in December 2017, in which IRS ruled out Spring of 2018, and firms purchased equipment 2018-2019 leading to manufacturing upgrades in 2020 and thereafter.
In summary, while both interest rate cuts and tax breaks tend to have a longer-term impact, their effectiveness also depends on the pace of implementation relative to the economy’s position in the business cycle. Equally important, other policies affecting manufacturing—such as higher production costs from increased tariffs—interact with fiscal and monetary measures. Lower taxes and reduced borrowing costs can help offset the impact of higher tariffs, all else being equal. For the plastics industry, with monthly demand remaining relatively stable, this long-term perspective supports a runway for sustained and extended growth.
