FED just paused raising interest rates. Here’s why that’s a big deal.
After months of doom and gloom, we may finally be seeing a glimmer of hope for the economy.
Recently, the Federal Reserve or FED (the central bank of the United States) announced it was taking a breather from increasing interest rates.
The much-needed break comes after a spree of 10 hikes in 15 months. In an attempt to fight inflation, FED has been aggressively raising interest rates since March 2022. But now, it seems we might (almost) be out of the woods.
The announcement came in light of promising data that shows price growth is slowing in areas like food and energy. Housing (the biggest cause of inflation) seems to be slowly stabilizing, too, with experts predicting prices will fall in the second half of the year.
But wait — you might be wondering why (and how) FED has the power to raise and lower interest rates whenever they like. And what does this mean for the bigger picture of the economy?
Why do central banks raise and lower interest rates?
Central banks like FED use a tool called monetary policy to manage the state of the economy and the total amount of money in circulation.
There are two different types of monetary policies:
Expansionary monetary policy:
During recessions or economic downturns, central banks lower interest rates. Simply put, banks make money cheaper to borrow. This encourages businesses (and citizens) to borrow and spend money, which stimulates economic growth. Remember those record-low interest rates during the first corona epidemic wave? That’s an extreme example of an expansionary monetary policy.
Contractionary monetary policy:
When the economy becomes overheated (like it did in 2022), the central banks use contractionary monetary strategies to pump the brakes. By creating extra barriers to borrowing money, they attempt to keep inflation under control.
One common way they do this is by increasing interest rates or adjusting the amount of collateral required to secure a loan. This is what has been happening in the US for the last 11 months.
By the way, the reason we only talk about FED is because it is the most important central bank of our time. All other economic regions (and their central banks) more or less copy FED’s monetary policy.
Why have interest rates been so low since 2010?
We’ve had a good run over the last decade, with interest rates in the US ranging from 0.9% and 3% from 2010 to 2020. That’s compared to the 5% range we’re seeing right now. So, what happened?
Well, from December 2007 to June 2009, the United States experienced its worst recession since World War II. Known as The Great Recession. This sent a huge economic ripple effect throughout the world.
In an attempt to breathe some life into the economy, the FED decreased interest rates in 2010 (yes, that’s expansionary monetary policy) and they stayed relatively low for a decade. They were beginning to tease upwards again when the COVID-19 pandemic hit in 2020. Suddenly, people feared another recession — and, they couldn’t really leave the house to spend money, anyway. So, in an attempt to pump money into the economy, interest rates plummeted to near zero again.
But that backfired with the highest inflation since 1981. That’s why we’ve seen the FED go into crisis control mode trying to level out the economy over the last year.
Is the pause good or bad for the economy?
The goal of contractionary monetary policy is to slow down the economy, which leads to businesses making fewer investments — and that means job losses and hiring freezes. Plus, people worldwide have felt the knock-on effect of the interest rate hikes, with the cost of living skyrocketing. So, the pause can only really be a good thing.
Of course, it doesn’t mean more interest rate increases aren’t on the horizon. FED predicts we’ll see two more price hikes by the end of 2023. But overall, it shows that they’re more optimistic about economic growth — and that a ‘soft landing’ might be a possible alternative to a full-blown recession.
What does this mean for designers?
There are some important insights we can take away from this interest rate rollercoaster — not only as everyday consumers but also in our daily work as designers:
Balance macro with micro: It’s wise to stay in the loop with the broader trends happening in the economy right now. But, for designers, what’s more important is how people feel about it. How is the current economic landscape affecting their day-to-day lives and their spending habits? Make sure to keep talking to your customers regularly, while still keeping an eye on the bigger picture.
Ride the wave: Any financial landscape can be the perfect opportunity to create impact and generate growth if you’re willing to think outside the box. In our recent newsletter, we wrote about how people spend more on little luxuries like lipstick in a recession. If you’re able to continue serving the needs of your customers regardless of what’s happening, you’ll always come out on top.
Redefine value: No matter which way the economy swings, one thing is certain: people are extra cautious with their money right now. If you’re pitching clients, you’ll likely find they want even more bang for their buck than ever. The key here isn’t to over-deliver to the point of burnout but to be more intentional about how you communicate value. This is why it’s so important to speak the language of business: so that financial decision-makers can understand how your work affects the bottom line.