How the Federal Reserve affects your business
By Joe Higgins, Quest 4 Quality
I can’t think of a better time to review the work of the Federal Reserve and its impact on our economy, your company and the well-being of consumers.
The Fed is a mysterious institution for most Americans because it holds the fate of millions of us with regard to inflation and employment. It is the only government agency that can raise and lower interest rates at will — and with no direction from politicians.
Jerome Powell is the chairman of the Fed, and he holds a quarterly meeting to make decisions about your financial future. Last spring he shared his progress on inflation and his outlook for the balance of the year. “Recent indicators suggest that economic activity has been expanding steadily,” he said, pointing to last year’s fourth-quarter GDP growth of 3.2%.
Some Basics
GDP is the amount of goods and services America produces in one year. The 10-year average for GDP growth is 2.3%, so our economy is growing faster than expected.
Then he discussed the labor market, which was in chaos just two years ago. “Over the past three months payroll job gains averaged 265,000 jobs per month. The unemployment rate has edged up but remains low, at 3.9%. Strong job creation has been accompanied by an increase in the supply of workers, reflecting increases in participation among individuals aged 25 to 54 years and a continued strong pace of immigration.”
Today’s unemployment rate still stands at 3.9%. It has only been under 4% four times in the past 74 years. Employment has been the jewel of our economy since the 2020 recession.
Powell went on to say, “Inflation has eased notably over the past year but remains above our longer-run goal of 2%.” More recently, with the inflation rate falling to 3.3% from its high of 9.1% in June 2022, he acknowledged “modest further progress toward the Committee’s 2% inflation objective,” and projected a rate cut before year’s end.
Bated Breath
Next came the most crucial part of the message. “If the economy evolves as projected,” he said, the Fed funds rate “will be 4.6% at the end of this year, 3.9% at the end of 2025 and 3.1% at the end of 2026.”
This statement is essential for several reasons. First, it signals interest rate cuts of around 0.75% each year over the next three years. It does not sound like much, but the impact of lowering interest rates is huge. It would bring down the annual percentage rate (APR) of credit cards to somewhere near 18%. Car loans would fall to 5% and the really big news is that mortgage rates could finally get into the 5.5% area. That’s where we need it to be for consumers to be willing to their homes on the market and open up inventory.
Powell concluded his address with this: “We understand that our actions affect communities, families and businesses across the country. Everything we do is in service to our public mission.”
The Fed had a lot of help bringing down inflation, thanks to a rapidly improving supply chain, rising employee productivity and the end of government stimulus money. In addition, big U.S. corporations, especially in our industries, began chasing market share by reducing prices. All these actions had the effect of lowering inflation.
Bottom Line
So what does this all mean for your business?
By reducing inflation without triggering a recession, the Fed has engineered a soft landing, and most sectors of the economy are better off today.
The one exception is housing. High mortgage rates have devastated home sales for three years, which has had a direct impact on sales of home goods. We will still suffer rates of around 6% for the balance of 2024, but the good news is it looks like this part of the U.S. economy will slowly heal and return to normal.
Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at Q4QwithJoe.com.
