Fed Rate Hikes Hit Closeout Buyers Hard. Excess Inventory Is Backing Up Fast.

surplus inventory, excess stock closeouts liquidation

The Federal Reserve on Wednesday raised interest rates by 0.75%, the largest move it has made in a single meeting since 1994. This move will affect all businesses including closeout buyers, liquidation buyers and excess inventory buyers. All businesses involved in buying and selling closeouts will be affected in one way or another. As rates increase the cost of holding dead inventory increases, and it becomes even more costly to hold onto closeouts that are taking up room in the warehouse. The central bank messaged that further interest rate hikes will come this year, as the Fed leans on higher borrowing costs to dampen demand and work to slow faster than expected inflation. During the pandemic, importers brought record amounts of inventory into the U.S. creating a huge surplus inventory of closeouts for excess inventory buyers. Overall economic activity appears to have picked up after edging down in the first quarter,” the policy-setting Federal Open Market Committee said in a statement, repeating its commitment to “ongoing increases.”The Fed decision lifts short-term borrowing costs to a target range between 1.50% and 1.75%. It is more important now than anytime over the past few years to dispose of dead inventory if you need room in the warehouse.

In economic projections released Wednesday, the median Fed policymaker expects to further raise interest rates to roughly 3.4% by the end of the year. Unfortunately, this means that consumers will have less disposable income to purchase overstock inventory, closeouts and excess stock as they are spending more money to service debt on mortgages, cars, rent, etc. That would suggest another 1.75% in total rate hikes, spread across the remaining four scheduled policy-setting meetings this year. The Fed is now messaging a much steeper path of rate hikes than it had previously forecast in March (when the median member projected a year-end short-term rate closer to 1.9%). Consumers no longer have the stash of savings they had in 2020 from Federal stimulus packages. That money allowed them to pour money into buying discounted merchandise, liquidation merchandise, closeouts and more from retailers like Costco, Walmart, Dollar Tree, Ollies and TJ Maxx. Now, as a result of inflation, these big box retailers are stuck with extra inventory that they want to get rid of to make room in the warehouse for new products. One of the most costly expenses is storing dead inventory that should instead be liquidated to liquidation buyers and excess inventory buyers for cash.

The urgency to move faster coincided with Fed policymakers’ expectations that inflation will not abate as fast as they had expected in their March projections. The lack of containers and supply chain disruption played a big part in creating an environment where merchandise was selling quickly and prices quickly escalated. But today we have the opposite with sales slowing and demand decreasing. Big box retailers are now looking for ways to get rid of old merchandise to make room in the warehouse for new products. They are overstocked with too much inventory they have to get rid of quickly The median Fed policymaker now expects prices to rise by 5.2%, as measured by personal consumption expenditures (PCE), over the course of 2022, a faster pace than the 4.3% it had forecast in March. The central bank also downgraded expectations on other key economic measures, expecting the U.S. economy to grow by only 1.7% this year, compared to the 2.8% it had forecast in March. Liquidation companies may be busier in 2022 than they have been in the past couple of years. As inventory backs up and companies need to sell overstock merchandise to make room in the warehouse, there will be more closeouts on the market. Companies that want to either move the warehouse or shut down their 3PL warehouse to get rid of merchandise will be faced with slowing sales, increased amounts of excess inventory and less demand from closeout companies and less demand from liquidation buyers. Fed officials also suggested they could see unemployment rise this year, with the median member now forecasting a 3.7% headline unemployment rate by the end of the year (which would be a notch up from the 3.6% recorded in May).

Consumers are already paying more for gas, groceries and everyday items, but they should expect to fork over more in other parts of their lives after Wednesday’s interest rate increase. The Federal Reserve’s move to rein in inflation will affect home mortgages, credit card borrowing, car loans, labor market stability and overall consumption. This is bad news for any business selling closeouts, overstock inventory, surplus merchandise and discounted general merchandise. As consumers are squeezed more and more, they have less disposable income to spend on pet product closeouts, discontinued toys and overstock general merchandise. The goal is to reduce the amount of money in the economy.“Too much money makes the money less valuable,” said Larry Harris, professor of finance at the USC Marshall School of Business and former chief economist at the U.S. Securities and Exchange Commission. “To control inflation, the Fed has to stop creating so much money. And when it stops creating money, interest rates tend to rise.”Though the Fed doesn’t set the interest rates consumers pay on their credit cards, mortgages or personal loans, it controls the federal funds rate, which is the basic rate at which banks borrow and lend among one another. When that moves, so do consumer interest rates. As rates go up, disposable spending goes down and there is a smaller market for liquidation buyers who make a living selling closeouts and discontinued inventory. Banks are required to have a certain amount of money in reserve, and when they make loans to people who want to buy homes or cars or to start businesses, they might have to borrow from other banks to make sure they maintain that reserve amount. Why does the Fed cut interest rates when the economy begins to struggle—or raise them when the economy is booming? The theory is that by cutting rates, borrowing costs decrease, and this prompts businesses to take out loans to hire more people and expand production. This also creates more surplus inventory and closeouts because it is easier from importers to get rid of their dead stock and liquidation inventory while there is demand. The logic works in reverse when the economy is hot. Here, we take a look at the impact on various parts of the economy when the Fed changes interest rates, from lending and borrowing to consumer spending to the stock market.

When interest rates change, there are real-world effects on the ways that consumers and businesses can access credit to make necessary purchases and plan their finances. When rates go up it is often better to convert dead inventory into cash to create cash flow without having to borrow at high rates. Dead stock sitting in the warehouse is very costly because if you need room in your warehouse it is better to get rid of old inventory that isn’t making you any money. Sure, you can rent more space for closeouts in a 3PL warehouse but does this really make good sense? No it doesn’t; you would be much better off to liquidate slow moving or dead inventory to make room for new products. This is where excess inventory buyers and closeout brokers can be helpful. They understand the closeout process and know how to liquidate inventory quickly. Closeouts are part of running any wholesale distribution business.

Though inflation showed signs of leveling off in April, the consumer price reading for May showed that inflation isn't slowing down. In May, inflation climbed by 1%, placing the rate at a 40-year high of 8.6% for the past 12 months. The CPI numbers came just days ahead of the Fed's June meeting, propelling the central bank to take swift and bold action to quell rising prices. If inflation continues to spiral out of control we are in danger of the consumer completely shutting down. This means 4th quarter holiday sales may be weak, leading to businesses having even more closeouts and excess inventory. As it is, Walmart and Target are already reporting high inventory levels and indicating it will take another quarter to reduce inventory back to normal levels. They do this buy having closeout promotions and liquidating inventory below cost.

Merchandise USA is a closeout buyer in business more than 37 years. We can help if you want to close down your 3PL warehouse, shut down your Amazon FBA, liquidate inventory to closeout a warehouse, or just sell slow moving products. We buy pet product closeouts, closeout toys, overstock housewares and home décor, as well as discontinued inventory you may need to get rid of to make room in the warehouse