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Federal Reserve Expected To Raise Interest Rates For First Time In 7 Years

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Federal Reserve Expected To Raise Interest Rates For First Time In 7 Years

Economy

Federal Reserve Expected To Raise Interest Rates For First Time In 7 Years

Federal Reserve Expected To Raise Interest Rates For First Time In 7 Years

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  • <iframe src="https://www.npr.org/player/embed/459718289/459718290" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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The Federal Reserve has held interest rates at super low levels for years in an effort to bolster the economy, but it is expected to raise rates for the first time in seven years this week.

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In December of 2008, the Federal Reserve cut interest rates to near zero to combat the financial crisis and the Great Recession. This Wednesday, exactly seven years later, the Fed is on track to increase interest rates for the first time since. As NPR's John Ydstie reports, analysts are split on whether the timing is right.

JOHN YDSTIE, BYLINE: Carl Tannenbaum is the chief economist at Northern Trust in Chicago.

CARL TANNENBAUM: The Fed is certainly going to raise interest rates on Wednesday. They've waited a long time for this moment.

YDSTIE: And Tannenbaum says the evidence is now clear that the economy is ready for a rate hike. The unemployment rate has fallen five percentage points from its peak during the recession, and job creation remains strong.

TANNENBAUM: I don't think the Federal Reserve would be making or contemplating this move if they didn't feel confident that the economy could withstand it. And in fact, some market participants are likely to interpret the Fed's hike in interest rates as something of a vote of confidence.

YDSTIE: But Megan Greene is not so sure.

MEGAN GREENE: No, I don't think that the economic data really justifies an interest rate hike right now.

YDSTIE: Greene is the chief economist at John Hancock Asset Management. She says there are still millions of Americans on the sidelines who want jobs or who work part-time and would rather have full-time jobs. And she says even with solid employment growth, wages aren't rising fast enough to push inflation higher. The Fed's mandate is to create the maximum number of jobs while keeping inflation in a sweet spot, about 2 percent a year, the level the Fed thinks is most conducive to healthy economic growth. For the past few years, inflation has been well below that target, and Greene says there's no sign that it's rising.

GREENE: I think the inflation outlook would suggest that the Fed shouldn't be hiking.

YDSTIE: Carl Tannenbaum acknowledges inflation is currently very low.

TANNENBAUM: The numbers on inflation certainly would not, on the surface, support a raise in interest rates.

YDSTIE: But Tannenbaum argues inflation is being held down in part by the sharp drop in oil prices, which he says will eventually reverse. He says rents, the biggest part of the consumer price index, are growing about 3 percent a year. He also points to a bump up in wage gains in recent jobs reports as a sign the upward pressure on wages is growing. That will boost consumer spending and put upward pressure on prices, he says. But Megan Greene is not convinced. She says an over-supply of labor globally is holding back the wages of U.S. workers. The modest wage gains they're experiencing won't lead to information, she says, and that means the Fed should leave rates right where they are, near zero.

GREENE: That being said, I think that the Fed will go ahead and hike.

YDSTIE: Greene says there are a couple of reasons the Fed might want to hike, even though there's no inflation pressure. One is that the Fed's low-interest policy has been aimed at pushing investors to take more risks to boost economic growth. But that can lead to bubbles in stocks, in bonds or real estate that threaten the financial system when they burst. Carl Tannenbaum agrees.

TANNENBAUM: The longer that they take before beginning to raise interest rates, the more likely it is that we could have excesses build up in markets because credit is so cheap, and money looking for a home might take too much risk.

YDSTIE: But in any case, Tannenbaum says the Fed's initial quarter-point hike in rates won't have much effect on the economy. And he says the Fed will likely signal it's going to take its time getting rates back to more normal levels. John Ydstie, NPR News, Washington.

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