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The Federal Reserve is doing something it hasn't done since 2006: raising interest rates. The long-awaited announcement by Fed chair Janet Yellen hikes a key short-term rate from near zero. For a closer look at how the Fed made its decision, Gwen Ifill talks with David Wessel of the Brookings Institution and Tara Siegel Bernard of The New York Times.
Now, up it finally went. The long-awaited and long-predicted interest rate hike was announced today by the Federal Reserve.
This afternoon in Washington, Fed Chair Janet Yellen explained economic conditions were ripe for the increase.
JANET YELLEN, Chair, Federal Reserve Chair:
The underlying health of the U.S. economy, I consider to be quite sound. I think it's a myth that expansions die of old age. I do not think that they die of old age. So, the fact that this has been quite a long expansion doesn't lead me to believe that its one that has — its days are numbered.
For a closer look at today's rate hike, both in terms of how the Fed makes its decisions and what this move might mean for your average household budget, we turn to David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at The Brookings Institution, a nonpartisan research center, and contributing correspondent to The Wall Street Journal, and Tara Siegel Bernard, personal finance reporter at The New York Times.
So, tell me. We have been talking about this for a long time. And as you just heard her talk about the long expansion, what took so long for them to finally make such an incremental move?
DAVID WESSEL, Brookkings Institution:
You sound impatient, Gwen.
Well, I think that the Fed has figured that interest rates needed to be low for a very long time because the economy was very slow to recover from a devastating recession, and because part of their strategy is to get inflation to a 2 percent target. And they're still not there.
So there was no reason to rush. And now they have decided the economy is healthy enough for them to just to begin to lift their foot gradually off the accelerator.
You mentioned inflation. She put in a little caveat there that if things were to begin to look southward, she would consider going back down again?
Well, what she said was what — people want to know, what's the Fed going to do next? That's what really matters. A quarter percentage point doesn't matter much, but this is the beginning of a longer process.
And what she said is, my colleagues on the Fed expect interest rates to go up perhaps a full percentage point over the next year, but we're only going to do that if we're convinced that inflation is moving to our target.
And she was very careful to leave herself a lot of flexibility on that.
Tara Siegel Bernard, when we hear her talk about — when we talk about 1 percentage increase in interest rates over the long — over the next year, what does that actually mean for people's pocketbooks? What does that mean for their ability to buy a house or buy a car?
TARA SIEGEL BERNARD, The New York Times:
Well, the big takeaway is that it doesn't have that much of an immediate impact.
We have only seen the rates rise a quarter of a percentage point today, and the Fed has telegraphed that this is going to be a very slow and gradual increase. So, even if we do get to 1 percent, yes, the cost of borrowing will rise marginally. You may be able to get a higher rate on a savings account, but for now it's really — it's pretty much the status quo for the most part.
So, if you're a retiree who's had a lot of your money in C.D.s and conservative investments, does this have any immediate effect or does it make you make a little bit more money now?
TARA SIEGEL BERNARD:
A teeny tiny amount of more money.
It's really going to be a small amount for people that are holding C.D.s, people that have deposit accounts at their local banks. Don't wait for them to immediately hike your rate. It's probably not going to happen. Banks are sitting on a lot of deposits.
And what usually kind of prompts them to raise their rate is to attract more. So, right now, they really don't need to. So, you shouldn't expect an immediate hike on your deposit or your C.D.s. That said, there are institutions that have raised their rates. You can find a whopping 1 percent at some online institutions.
So, the big takeaway is to shop around. There are some better opportunities, but it's still pretty meager at the end of the day.
So, David, if this is pretty meager at the end of the day, are we talking about the impact of this increase or the trend line that it is setting?
We're talking about the trend line.
What Janet Yellen said today is that they expect this to be gradual. Because this is such a big change in monetary policy, because we have had seven years of zero interest rates, almost unprecedented in American history, she wants to be very careful that she doesn't throw the economy off balance.
So this was designed not to upset anybody. And they succeeded in that. But if the economy continues to get better, they will ratchet rates up, and those people you referred to on C.D.s will be getting more interest on their savings a year from now, and people will be paying more for mortgages a year from now.
Let's broaden this out to the global economic impact. David, are people watching from around the world what she does in this case as a cue to what they do?
Even more than ever, what the Fed does really matters around the world. There has been a lot of anxiety, for instance, in emerging markets. When rates were low here, a lot of money went to emerging markets. It has started to come back. So, emerging markets have to manage their currencies very carefully when the Fed is moving.
China is changing the way it manages its currency in anticipation of the dollars rising as the Fed tightens. So, it has huge impacts. And she referred that today. She said the U.S. economy is in pretty good shape, getting better, but she's worried about the rest of the world.
Her judgment is that the U.S. economy is strong enough to offset the weakness abroad, but that could change.
Tara Siegel Bernard, a lot of people have a pocketful, especially at holiday time, pocketful of credit cards, which they are using liberally. Does today's actions affect how they treat their credit standing, their credit investment, their spending?
Well, the rate hike will jack up your credit card interest rate a bit.
And pretty much in line with the Fed's action today, people can expect that to be reflected in their credit card statements within one to two billing cycles. There are still — if people are carrying debt on their credit cards and slowly paying it off, now's the time to find those last remaining zero percent balance transfer offers, and take advantage of those now while they're still available.
But rates will rise on credit cards, variable rate cards, by — in line with the Fed.
So, David, Wall Street seemed to take this all in stride today. They seemed to see it coming. This gradual buildup clearly had its effect, its intended effect.
Right. It was by design.
So, I think when you score Janet Yellen, how did she do, you would say, A, they wanted to prepare the markets for this so there wouldn't be any uproar.
In 1994, when the Fed raised interest rates after a long period of calm, there was a big uproar in the market. She succeeded in that.
I think her other goal was to keep this committee that she chairs, it's now 10 voters at the moment, unanimous, because when you have got a big change, you don't want a lot of dissent. We know there are people who are impatient who want rates to go up faster. We know there are others, even some governors of the board, Dan Tarullo and Lael Brainard, who expressed some reservations about this.
So she must have worked very hard to get them all to agree that not everybody likes this, but we're going to do this, and let's do it all together because it strengthens her hand and her credibility.
So, she's been there in this chair for about two years now.
How's she measuring up? Because, as we know, the Republicans complain that she is — that they don't like the Fed. And the Democrats have been — had mixed response to today's move.
Well, the — yes, Bernie Sanders and Gene Sperling, who is an adviser to Hillary Clinton, they criticized the move.
I noticed that Sheila Bair, who used to be head of the FDIC, praised it. I didn't see any Republicans. But the Republicans in general have thought the Fed was keeping interest rates too low. I think that this is her first big test.
Until now, she's basically been following the game plan that Ben Bernanke left her. This was an important call, when to start raising rates and how to do it. And there will be a series of calls like this over the next year. She will have to decide, did this work out as I expected? Should I continue to ratchet things up?
She has a real communications problem, because she wants to tell people rates are going up, but she also wants to assure them, if the economy deteriorates, she won't do it, and everybody will complain that she's confusing them.
Must be fun to be the chairman of the Fed.
David Wessel of the Brookings Institution and The Wall Street Journal, and Tara Siegel Bernard of The New York Times, thank you both very much.
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