How Interest Rate Cuts Will Affect Beauty Supplies

In September 2024, the U.S. Federal Reserve System (the Fed) made a big cut, a 0.5% point off benchmark rates. So, how does a Fed’s cut affect our beauty supply store? When they cut interest rates, they say that it stimulates the economy, but does that mean business as usual, or going back to the recession? If you’re curious about the impact of interest rate cuts on the real economy which encompasses the beauty supply business, please keep reading.

Behind the Fed’s cut

An interest rate is the percentage of a loan or investment that determines the amount of interest paid or earned. When it comes to interest rates, the terms “Big Cut” and “Baby Cut” often appear in news articles. The “cut” here refers to the amount of the rate cut, with a big cut usually meaning a 0.5% cut and used to provide a strong stimulus when the economy is in a deep recession. A baby cut, on the other hand, refers to a 0.25% cut and is used when economic conditions are somewhat uncertain but a drastic adjustment is not necessary.

Note that during the pandemic-induced rate hikes a few years ago, the term “step” was used instead of “cut,” which refers to the amount of the rate hike as opposed to a cut. A 0.25% raise is common, called a “baby step,” and a larger 0.5% raise is called a “big step.

Terms related to rate cuts and rate hikes

The impact of rate hikes and rate cuts can be summarized in a nutshell as follows:

High interest rates

It’s associated with Inflation. The market overheats as people’s cost of living increases and they need to spend more money to stay afloat. In response, the Fed will raise interest rates to prevent the economy from overheating. When interest rates rise, people will borrow less and spend less because it’s more expensive to borrow money. This would have the effect of reducing consumption and investment and slowing economic activity, which in turn would curb inflation.

Low interest rates

People see the price of goods going down and think, “It’s going to go down more,” so they postpone their big purchases. This means that the market goes inactive. Then, the Fed lowers the interest rate to stimulate the economy. When interest rates are low, it’s cheaper to borrow money, so people borrow more and spend more. The idea is that easier access to money stimulates consumption and investment. This has the effect of stimulating economic activity and adjusting prices to the appropriate level.

The graph above shows the annual change in the Consumer Price Index (CPI) as a percentage of average hourly earnings. As you can see, from 2022 to mid-2023, inflation far exceeded income growth, but from mid-2023 to the present, inflation is growing slower than income growth. As mentioned earlier, inflation was so high in 2022-2023 that the Fed raised its benchmark interest rate to 5.25% to restrain inflation. This is why home mortgage interest rates were so high until last year. Now that prices have stabilized somewhat, the Fed has cut the rate to stimulate the economy.

So, what’s the impact on beauty supplies?

What are the actual owners of beauty supply stores thinking about the rate cuts that were made to “stimulate the economy”? A store owner, who runs a small 2,000-square-foot retail store in the South, said, “When you see the news of interest rate cuts, they sound like the economy will be revitalized immediately. I don’t see that coming. After Back to School, sales have completely tanked. The rate cut may have an impact on the macro economy, but I doubt it will affect small shops like ours,” he sighs.

A salesperson at a wholesaler has the same opinion. A sales manager, who has worked in the beauty supply general merchandise sector for more than five years, said, “I would rather believe the beauty industry would improve if the government gave people tens of thousands of dollars than it waits for the economy to be revitalized by lowering interest rates. But I don’t think they’re going to just hand out money even in the event of a pandemic after what happened, so at the end of the day, I don’t think it’s going to have a big impact on the beauty industry. But when I see business owners who keep opening new stores while saying their business is so bad, it’s interesting, and I sometimes think they might be just crying out loud,” he says with a bitter smile.

There is a clear disconnect between what governments expect from rate cuts and the people who are directly impacted by the real economy. The Fed’s rate cuts don’t always have good results. In particular, a prolonged low-interest rate environment can have a negative impact on economic growth. It can reduce companies’ research and development (R&D) investments and lower economic growth, and it can increase financial risk as asset prices become overvalued and debt increases. And if interest rates continue to fall, monetary policy may become less and less stimulative.

Rate cuts also have a big impact on the labor market. As companies increase their investments, they create more employment opportunities, but this can have a negative impact on wages and productivity in the long run. In other words, while lower interest rates can improve the job market, especially for small businesses and vulnerable populations, allowing companies with easier financing to hire more workers with the low interest rates, in the long run, can put downward pressure on wages, negatively impacting real wages.

Therefore, while interest rate cuts can have a positive effect in the short term by stimulating the economy and increasing employment, they can also have negative effects in the long term, such as lowering economic growth and increasing financial risks, so policies need to balance the short-term and long-term effects.

We all do business in the U.S, so U.S. policies matter to all. Paying attention to monetary policies, even in a cursory way, will help you in the future when you need to make big decisions like whether to expand, maintain, or close your business. A shared thought from a longtime beauty supply business owner sheds some light on how we should approach these times.

“I owned a beauty supply store in the area for almost 30 years. There are always ups and downs in business. There were days when business was really good and there were days when it was really bad. It’s true that it peaked during the pandemic. But the point is, I don’t think there was a day that went by that I didn’t bring my effort to the business. I’ve gotten this far because I always try to be nice to the people who visit my shop, and I make sure they get what they’re looking for on time. We’ve had a lot of presidents in 30 years. The economic policies were different at each time, but I don’t think they made dips in the trajectory. It was more a matter of how I went about it. I think if you take life one day at a time and do the best you can, you can eventually make more money, or you can take it easy, work moderately, and enjoy life. The bottom line is whether you cut or raise rates, it all comes down to you in the end,” he laughs.

People’s lives, like economic indicators, have their ups and downs. Many people say that business is down right now. This means an uphill climb is coming. If you stay hopeful and do your best every day, you’ll get to where you want to be.