The Federal Reserve decided today to raise its benchmark interest rate .25 percent, a move widely expected by investors and economists. But why?
The answer is that interest rates have remained near zero ever since the Great Recession, when the Federal Reserve decided to slash spending and unfreeze the economy, an economy that has been steadily improving from then to now. November saw the 74th month of consecutive job growth, and the unemployment rate has hovered around 5 percent for over a year — dropping, in fact, to 4.6 percent in November (although not for entirely good reasons). The stock market has tripled from its Great Crash low, with the Dow Jones Industrial Average speeding toward 20,000 this week.
“Economic growth has picked up since the middle of the year,” said Federal Reserve Chair Janet Yellen, predictably enough. “We expect the economy will continue to perform well.”
Last year, the Fed raised interest rates for the first time in over 10 years, inching up the so-called federal funds rate, the rate at which the Fed lends money to banks. Today, almost a year ago to the day of the last increase, the Fed decided to raise the federal funds rate from a range of .25 to .5 percent to a range of .5 to .75 percent.
So what does it mean for you?
Not much, said University of Michigan economist Justin Wolfers, who will appear on our Making Sen$e broadcast story tomorrow evening.
Fed raises rates from super low to merely very low. Not much to argue about here — it's still really really cheap to borrow money.
— Justin Wolfers (@JustinWolfers) December 14, 2016
Greg McBride, Bankrate.com’s chief financial analyst agreed, but noted that if rates continue to rise, borrowers could begin to feel it. “This single quarter-point move in interest rates will go largely unnoticed at the household level, but coupled with last year’s hike, the cumulative effect could mount quickly if the Fed quickens the pace of rate hikes in 2017,” he said in a statement.
Right now, the Fed is only signaling three interest rate hikes in 2017, as per economist Mohamed A. El-Erian:
— Mohamed A. El-Erian (@elerianm) December 14, 2016
At the Fed’s annual Jackson Hole conference in August, Federal Reserve Chair Janet Yellen had announced her desire to raise interest rates — a lot, suggesting that, as the economy recovers, the Fed would like to have interest rates higher, so that in the future, the Fed could combat a possible recession by again cutting them. A federal funds rate of 3 percent would seem to be the target. That would require roughly a dozen quarter point raises.
Economist Terry Burnham certainly thinks there are plenty of interest rate hikes to come in 2017. Others, like Jared Bernstein, see the Fed’s move as a “hedge against Trump-induced fiscal pressure that may or may not appear.” (By “fiscal pressure,” Bernstein means more government spending.)
Don't make too much out of the extra hike Fed pencilled in for '17–hedge against Trump-induced fiscal pressure that may or may not appear.
— Jared Bernstein (@econjared) December 14, 2016
Our own economics correspondent Paul Solman has a somewhat different view: that with short term interest rates already rising dramatically in the bond market, presumably influenced by expectations of Trumpian stimulus and perhaps, as a result, inflation, the Fed is simply following an economic trend, instead of operating independently.