Why does The Federal Reserve (The Fed) steer a strong economy?

money trapped in a birdcage

The fed has raised interest rates, again. It’s a move that could have a negative effect on money flow and small businesses.

Did you know the US Federal Reserve is the central bank of the United States?

What is the Federal Reserve?

The United States Federal Reserve, more commonly referred to as “The Fed,” is the central bank of the United States and is responsible for conducting monetary policy and regulating the nation’s banks. The Federal Reserve is an independent agency of the United States government, created by Congress under the Federal Reserve Act of 1913.

The Fed is responsible for making sure prices are stable and employment is high. To make sure prices do not drop, the Fed uses monetary policy.

The Fed and it's affect on small businesses

A little history of The Fed

For over a century, the role of this critical organization in US monetary policy and financial stability has been a source of great contention. While some see The Fed as meddling in a strong economy, others argue that The Fed is only reigning in unnecessary spending in a tight market.

Current rate hikes

Back in May, the federal reserve saw there was no sign of the economy weakening and decided to raise interest rates by .75 points.

After that first strike after tax season failed to slow down American consumers, The Fed raised interest rates again in June. Then they saw July’s numbers were still not slowing down. So they said “The economy is doing so well, that we have to get ahead of it” and they have raised rates again.

The last rate hike of .75% was just last month. The Fed argued that supply chains were being disrupted due to the ongoing pandemic leading to empty shelves in some parts of the United States. Even though supplies were low, consumers were still spending at what The Fed deemed an alarming rate. That rate hike was intended to slow the American consumer down and stop them from buying big-ticket items like cars and houses. It didn’t work

Now they have raised rates again, fueling the fastest rate hikes in American history. The fed is worried about the spike in inflation. This is the second time this year that the Fed has raised rates by 0.75%

The Federal Reserve has now raised rates three times this year. The increase has been quick, and it follows a trend of a fast but steady economy.

From BankRate.com “Fed officials are hiking interest rates by the fastest pace in decades — likely by the most since the 1980s when it’s all said and done. The Fed’s benchmark rate could rise to a target range of 3.25-3.5 percent by the end of this year, according to policymakers’ latest rate projections.”

How does a rate increase affect small businesses?

Small businesses rely on the availability and affordability of credit to fuel growth, but like all consumers, they must also be aware of how actions by the Federal Reserve can impact their ability to obtain a loan.

The pandemic is clearly not over, and interest rates will most certainly see another hike before the year is over. The goal of The fed is to slow consumers down in their spending habits, causing prices to lower and, in turn getting inflation under control. This affects small businesses in a negative way; less consumer spending usually means consumers are buying at discount and big box stores rather than small shops and boutiques.

The basic rule of thumb is: How you fare will depend on your business, your industry, and the economy. Businesses with high debt loads and high fixed expenses may see the most immediate impact from the recent increases in interest rates. In fact, in a 2015 survey by Bank of America of small business owners who used credit cards to pay for their business expenses, around half said that a one percent rise in interest rates would cause them to reevaluate their operating models.

Bank accounts that have large balances tied up in CDs, crypto, savings accounts, or money market accounts are likely not as tied to short-term interest rate fluctuations. So, even though the Fed has started raising short-term interest rates, if your business has a significant amount of cash on hand, you might not feel any immediate impact on your bottom line.

Unnecessary rate hikes coupled with uncertainty around the pandemic have put lots of people out of business. If you need help marketing your business, consider The Business Resource Directory.

So why the constant rate hikes in 2022?

In a word, DEMAND.

In the United States, the demand for goods and services is far outpacing the demand for labor.

So what about labor?

As recently as May, an Entrepreneur Magazine article stated that there are currently two jobs available for every applicant. That puts the prospective employee in a place of power, and employers are paying up, only exacerbating the demand issue.

Business owners are finding themselves covering shifts for a number of reasons. New hires don’t show up, the new hire has more demands on starting day, the new hire works a couple of days and never returns from lunch. These are actual situations a hiring manager I know has to confront.

It’s not just new employees either, seasoned employees are seeing expanded workloads and longer hours. Those employees want to (and should be) compensated, but they are usually not. Now, those seasoned employees are willing to quit because the job market is so strong, and they can most likely trade up to higher-paying jobs. Again, this exacerbates the situation.

What about “quiet quitting”?

Employees like to call it “working your wage”, or doing the bare minimum to remain employed. It is a tactic that is gaining popularity however, this is not a trend we see continuing in the long term.