Increases in the cost of living affect low-income households much more than higher-income households. Therefore, the effects of our government’s monetary policies to control the cost of living are most visible at locations where low-income households shop, such as McDonald’s. If low-income households have less discretionary income to buy a burger, it is an indicator that the Federal Reserve’s policies are no longer having their desired effects.
To be a bit more specific, the Federal Reserve (Fed) sets short-term interest rate targets. Lower interest rates keep borrowing costs low, thereby stimulating economic growth. While economic growth may seem like a no-brainer on the surface, economic growth leads to what is known as “inflation,” or you have to pay more for goods and services.
Higher interest rates, by contrast, put pressure on borrowing and slow inflation. The Federal Reserve adjusts these rates up and down to manage growth and inflation. While inflation puts pressure to raise employee wages to keep up with inflation, many Americans, especially older ones, have left the workforce and are no longer receiving wage-based income.
Instead, they are receiving portfolio income from stocks and bonds they accumulated while they were working. While stock values generally adjust for inflation, bond rates are tied to the Fed’s interest rate. Therefore, a lower federal interest rate translates into bonds paying lower rates of return. Baby boomers are leaving the workforce and retiring.
Many retired individuals, rather than risk their retirement savings entirely on returns from the stock market, increasingly rely more on fixed-income sources, such as income from bonds. Since yields from fixed-income sources are tied to the Fed’s interest rate, households that rely on fixed-income sources are the hardest hit by inflation.
As the price of goods and services rises faster with inflation, households with income from fixed-income sources are left with less disposable income. McDonald’s has been experiencing a slump in revenues. This may be a sign that the lower interest rates designed to help stimulate the economy are no longer having the desired effects.
How will an increase in interest rates or less disposable income from lower-income customers affect your business?
