(WKBN) – The Federal Reserve announced an increase in interest rates again Wednesday by three-quarters of a point. It was the largest hike in nearly 30 years.
The rate hike is being done to slow down inflation by tempering spending. Consumers have to slow spending for the rate hikes to work in the battle against inflation.
The Fed is the government’s central bank and influences the economy. Its decision affects inflation, unemployment, manufacturing and other businesses.
You may think that getting people to slow spending would be counterproductive, but by making borrowing more expensive with the rate hike, the thinking is people will tend to spend less. That forces producers to cut their prices, including airlines, hotels, box stores, etc, and companies will put things on sale and will need fewer employees.
Will it work? According to a report by the Associated Press, retail sales in May fell by 0.3% but the numbers are convoluted.
A sharp decline in auto sales, largely because of higher prices and shortages of new car inventories, depressed the retail sales figure. Excluding autos, retail sales actually rose 0.5% last month. But excluding sales from gas stations, retail sales slipped 0.7%, showing how higher prices at the pump are accounting for more of shoppers’ overall spending.
The report also highlighted shoppers’ pullback on some of the products that were in hot demand during the height of the pandemic but are now falling out of favor. Sales fell roughly 1% for furniture and home furnishings stores and electronic and appliance retailers. Building and garden supply stores, as well as general merchandise retailers, are also showing signs of a sales slowdown.
Sales online fell 1%, as shoppers go back to physical stores. Meanwhile, sales at food stores rose 1.2% due to higher prices, not increased consumption. Business at restaurants was up 0.7%.
However, gas prices are an indicator of where consumers are right now in their spending. Simple supply and demand can offset anything the Fed does to temper spending.
It’s a delicate balance to get consumers to spend just enough to support the economy but not so much that demand tips too much.