What Does the Interest Rate Change Mean For Your Job?

I know it can be confusing to connect what you hear in the news with how it impacts your organization and your job. We’ve just received great economic news with the .5% rate cut from the Federal Reserve. What this means is that inflation is cooling. The “Fed” has been working levers behind the scenes to push inflation down to the 2% level. The U.S. economy is now at about 2.5% and the Fed feels comfortable easing interest rates. ??

You might wonder what one has to do with the other. Let’s consider where inflation comes from. The Pandemic of 2020 stalled economies worldwide – low activity, no growth. The majority of businesses were struggling, and the government provided assistance to individuals and businesses in a big way. That created an infusion of money into our economy, plus interest rates were still almost 0% from the Federal Reserve because of their work to help organizations recuperate from the Great Financial Recession of 2008. So when all of this crisis money hit the market with 0% interest rates, there was too much money and too little competition in the economy. It was off balance – too much demand and not enough supply.

When the safety and health concerns started to ease, the demand created more jobs and higher wages. A large factor in the health of an economy is how much consumers spend. More jobs and higher wages create higher consumer spending. In fact, consumer spending went so high after the Pandemic and happened across so many businesses and sectors, inflation creeped in through higher prices. Businesses hired more people to keep up, but also took advantage of the heavy demand to increase prices.

If that sounds like a circle – you’re right, it kinda is. The flow of money in general is a circle.

So, we landed with high prices, low interest rates, high demand, low supply. To motivate decreases in prices, the Federal Reserve started to increase the interest rate that is used as the basis for banks to set their fees. This lever makes it harder for a business or organization to borrow money – it’s more expensive. The Fed was trying to cool the spending, which would cool job creation and cool demand. All that cooling would lead (potentially) to lower prices, i.e., lower inflation. ?

What does this mean to your organization?

It means interest rates for borrowing money will start to decrease and cashflow will improve. We must remember that organizations’ revenue or income fluctuates. When cashflow is too low to cover all their expenses (think of those fixed costs such as payroll, payroll taxes, employee benefits, etc.), the organization must borrow money to cover them in the short term. The interest your organization pays on borrowing that short-term capital increases expenses that must be covered as well. Think of it like a credit card with a high interest rate.

Interest rates on borrowing money are pinned to the Federal Reserve interest rate. Based on the Fed’s interest rate, banks manage the rates they charge to their customers, i.e. other banks, organizations, and individuals. So, when the Fed raises or lowers the interest rate that serves as the benchmark, that ripples outward - like a stone in a pond - throughout the economy and the world because so many countries and organizations internationally are tied heavily to the U.S. economy.

For your organization, the new interest rate may mean a reduction in the expenses that must be paid each month. That improves cash flow for your organization and may free up new funding for projects, hiring or merit increases. It won’t happen overnight, but gradually over the coming months. This is welcome relief after four years of stifling inflation and upheaval in cashflow.?

If we see a second .5% decrease by the Federal Reserve before the end of the year – as some have suggested could happen - this could really help organizations’ cashflow. It will be good for the economy, good for employment - which has been slowing as everyone knows, and good for projects and transformations as organizations try to improve their financial standing while they can.

In fact, recession predictions have dropped to 35%. This is all great news.

#strategichumanresourcesmanagement #hrstrategies #hrstrategy #humancapitalmanagement #hr #humanresources #leadership #leadershipskills #leadershipdevelopment #HRIS #economy #operations #criticalthinking #upskilling #hrleader #hrexecutive

www.hrpmouniversity.com