ECON 230: Milestone 3

Week #6: Milestone 3

Josh Vonhof

Dr. Jeff Bajah

ECON 230 — Macroeconomics

21 December, 2021

Milestone #3

Federal Reserve & Central Banks Effect on McDonald’s Economic Growth

Both the Federal Reserve and central banks can make changes and decisions that have far reaching implications on many companies growth. McDonald’s is in no way exempt from this. In the U.S., the Federal Reserve is considered to be the central banking system. And it serves several different, but very important functions.

The first of these functions is conducting “the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy” (About the Fed, 2021, para. 2). This function of the Federal Reserve has become even more important with the spread of COVID-19. In its early stages, the virus caused widespread fear that resulted in a rapid drop in financial markets as well as severe damage to the economy as a whole. With so many people staying home, employment rates dropped drastically along with severe price fluctuations affecting many items. This was certainly the case for McDonalds as well. According to an article by authors Balu and Russ, “About 96% of McDonald’s locations are operating with [only] drive-thru, delivery or reduced seating capacity” (Balu & Russ, 2020, para. 9). With dining rooms being closed and many restaurant operating on limited hours; many locations have had to cut employees or lost them as a result of the pandemic. In response to this, the Federal Reserve “stepped in with a broad array of actions to limit the economic damage from the pandemic, including up to $2.3 trillion in lending to support households, employers, financial markets, and state and local governments” (Cheng et al., 2021, para. 1). Also included among the broad array of actions were temporarily relaxing regulations, direct lending to major corporate employers, and reducing the federal funds rate to name a few. All of this provided McDonald’s with the opportunity to receive funds in order to retain employees and keep their locations operational. Which is incredibly important for a company that relies so heavily on high sales volume. And while it did not protect McDonald’s entirely from the challenges facing a company during this difficult time. The Federal Reserve’s actions helped to serve as a hedge that protected many companies that could have suffered significantly more damage had they not been given additional funds to help keep people employed. Plus, on top of this, access to additional loans with lower interest rates have allowed companies to to get the funds that they need.

The Federal Reserve also “fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments (About the Fed, 2021, para. 2). This is of vital importance for any company that operates within the United States. Transactions are supposed to be fair to both parties. A win-win situation where the consumer gets the product that they want and the company gets money in return for selling the consumer their products. This is an idea that is even discussed several times in Scripture. Proverbs 11:1 states that, “The Lord detests dishonest scales, but accurate weights find favor with him (New International Version, 2011, Proverbs 11:1). Back then, merchants would use weights to determine the weight as well as the price of a particular product. They could use dishonest weights and measures in an attempt to charge their customers more. This would obviously be considered an unethical business practice. The Federal Reserve helps to ensure not only that the companies are maintaining ethical practices, but also that the customers are not cheating the companies out of the money that they deserve. This is extremely important for a company such as McDonald’s that is constantly looking to expand and grow to new areas. It gives then the confidence that transactions will be well regulated and that they will get the money that they deserve for each transaction no matter where they go in the country.

Finally, while the Federal Reserve does a lot to help these companies, they can also make life more challenging on them as well. It has already been established that the Federal Reserve is in charge of regulating the financial space. And while many of the regulations help to ensure fair business transactions and practices for both sides; these regulations can present challenges for businesses. There are a considerable number of Federal Reserve Regulations that set limitations for banks. There are many times when these “regulations are restrictive, meaning they limit a bank’s activities” (What is the Fed: Supervision and Regulation, n.d., para. 9). This can create problems for McDonald’s as the company often has large portions of money invested into real estate for their numerous locations along with investments into different countries and product ideas. With so much of the company’s resources tied up in these different areas, it is very important that the company can get the funds that they need for other expenses that may arise. This could prove challenging if regulations slow down the process.

In McDonald’s other key market, China, the Central Bank of China has functions very similar to that of the U.S. Federal Reserve. Among the tasks that the Chinese Central Bank is responsible for are monetary management, financial inspection, payment and settlement systems, currency issuance, and fiscal agency functions to name a few (Operations of the Bank, 2021). All of these different functions of the Central Bank can affect McDonald’s for better or worse depending on the decisions that the Central Bank chooses to make. For instance, while the Central Bank of China has managed inflation relatively well, “Inflation rates of developed regions in the world are still generally lower than in China” (Textor, 2021, para. 2). These higher inflation rates are important to McDonald’s because it affects the costs of everything within that market. For instance, food and labor costs, which are two of the largest costs in the fast-food industry will both be significantly higher with higher inflation rates. This could force McDonald’s within the Chinese market to raise the prices of their food or find some other way to cut costs in an effort to remain profitable. The Central Bank of China can impact inflation rates by issuing more currency, or by taking some currency out of circulation.

The Chinese Central Bank is also responsible for monitoring the reserve ratios of the country. Reserve Ratio’s determine “the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest” (Kent, 2021, para. 1). As was mentioned previously, McDonald’s has large portions of money tied up in various investments including the vast amounts of real estate that they own and the investments that they have made into the different markets and communities that they are involved in. Pair this with the face that the company is always is looking for new investment and growth opportunities. This puts McDonald’s in a positions where it will have to borrow money at times. The reserve ratio set by the Central Bank of China will affect how readily available and how much the different McDonald’s franchisees and the company as a whole can borrow and use. Thus impacting their ability to make new investments and continue growing the company within the Chinese market.

Effects of Fiscal Policy

Fiscal policy involves “how governments adjust their spending levels and tax rates so they can influence the economy” (What is Fiscal Policy?, 2020, para. 3). Much of the recent U.S. fiscal policy has been devoted to responding to the COVID-19 Pandemic. The United States Government responded to the challenges of this crisis by coming up with an “enormous $5.2 trillion” response which “likely has put the economy on a path to recovery, but it may end up discouraging future spending on other pressing needs” (Romer, 2021, para. 1). Included in this fiscal response were stimulus checks, the Paycheck Protection Program, and additions to the Public Health Fund. All of this certainly helped to pump money back into the U.S. economy, giving people spending money that they may not have had otherwise. This certainly benefited McDonald’s as the company did not lose as much in sales as they could have had this money not been added into the economy. Especially with people having additional stimulus money to spend. The potential downside for the company is that in the near future this could have serious negative impacts as well. One of these negatives that has already begun to come to fruition is a lack of available workers. Many companies are unable to find enough employees because of the stimulus payments along with increased unemployment payments. This makes it difficult for many fast-food companies to keep staff their restaurants, and thus to keep their stores open for their normal hours. This has impacted McDonald’s and other companies sales significantly.

As far as fiscal policy in China is concerned, the country has been more sparing than the United States. According to Evelyn Chang, “China’s monetary policy remains within a normal range” and the country’s leadership has decided that they “would not embark on large-scale, flood-like stimulus” (Cheng, 2021, para. 3). This is certainly a more cautious approach than the U.S. which is giving out money hand-over-foot. And while a more cautious approach will certainly affect companies such as McDonald’s in the short term because there will be less money circulating in the economy short term. It will help protect against inflation in the future and will force more people to remain employed than in the United States. These are two big benefits for McDonald’s within the Chinese market looking forwards. And are big reasons why McDonald’s may look to continuing to increasing their investment and growing their company within the Chinese market.

References

About the Fed (2021). The Federal Reserve. Retrieved from https://www.federalreserve.gov/aboutthefed.htm

Balu, N. & Russ, H. (2020). McDonald’s Global Sales Suffer as COVID-19 Lockdowns Limit Options. Reuters. Retrieved from https://www.reuters.com/article/us-mcdonald-s-corp-results/mcdonalds-global-sales-suffer-as-covid-19-lockdowns-limit-operations- idUSKCN24T1FO

Cheng, E. (2021). China’s Central Bank Keeps the Brakes on Economic Stimulus. CNBC. Retrieved from https://www.cnbc.com/2021/09/08/chinas-central-bank-keeps-the-brakes-on-economic-stimulus.html

Cheng, J. et al. (2021). What’s the Fed Doing in Response to the COVID-19 Crisis? What More Could it Do? Brookings. Retrieved from https://www.brookings.edu/research/fed- response-to-covid19/

Kent, W. (2021). Reserve Ratio Definition. Investopedia. Retrieved from https:// www.investopedia.com/terms/r/reserveratio.asp

New International Version (2011). Bible Gateway. Retrieved from https:// www.biblegateway.com/passage/?search=Proverbs%2011%3A1&version=NIV

Operations of the Bank (2021). Central Bank of the Republic of China. Retrieved from https://www.cbc.gov.tw/en/lp-453-2.html

Romer, C. (2021). The Fiscal Policy Response to the Pandemic. Brookings. Retrieved from https://www.brookings.edu/bpea-articles/the-fiscal-policy-response-to-the-pandemic/

Textor, C. (2021). Monthly Inflation Rate in China October 2021. Statista. Retrieved from https://www.statista.com/statistics/271667/monthly-inflation-rate-in-china/

What is Fiscal Policy? (2020). Its Up to Us. Retrieved from https://www.itsuptous.org/US-fiscal-policy

What is the Fed: Supervision and Regulation (n.d.). Federal Reserve Bank of San Francisco. Retrieved from https://www.frbsf.org/education/teacher-resources/what-is-the-fed/supervision-regulation/