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As Expected, Federal Reserve Raises Short-Term Interest Rates
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As Expected, Federal Reserve Raises Short-Term Interest Rates

Economy

As Expected, Federal Reserve Raises Short-Term Interest Rates

As Expected, Federal Reserve Raises Short-Term Interest Rates
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  • <iframe src="https://www.npr.org/player/embed/460082531/460082532" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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Going forward, the Fed will be trying to perform a delicate balancing act: getting interest rates back into more normal territory without hitting the brakes on the still recovering economy.

RENEE MONTAGNE, HOST:

The Federal Reserve made history yesterday when it pulled the trigger and raised interest rates. It's been about a decade since the last time the Fed raised rates. Those low rates have been stimulating the economy by making it cheap to borrow money. NPR's Chris Arnold has more.

CHRIS ARNOLD, BYLINE: If the economy was a patient in a hospital, with this rate the Fed saying basically, OK, you're getting a lot healthier. Let's start weaning you off this medication of super low interest rates. Fed chair Janet Yellen.

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JANET YELLEN: This action marks the end of an extraordinary seven-year period during which the Federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression.

ARNOLD: Yellen said the economy now is in much better shape. The unemployment rate has fallen by half, from 10 percent down to 5 percent. That's helped household spending. Yellen noted that purchases in motor vehicles have been particularly strong lately. So she says the decision to move now to start raising rates reflects...

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YELLEN: It reflects the committee's confidence that the economy will continue to strengthen. The economic recovery has clearly come a long way, although it is not yet complete. Room for further improvement in the labor market remains.

ARNOLD: Many economists say they'd like to see stronger wage growth for more Americans. The housing market is still recovering slowly. So if there's still room for improvement, though, why risk slowing down the recovery by raising rates? Yellen said by gradually starting to raise rates now the Fed can move slowly and carefully, but if it waited too long to start doing that, the economy might overheat, inflation might start rising too quickly...

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YELLEN: We would likely end up having to tighten policy relatively abruptly at some point to keep the economy from overheating and inflation from significantly overshooting our objective. Such an abrupt tightening could increase the risk of pushing the economy into recession.

ARNOLD: And Yellen stressed that so far the Fed has only moved its target rate by a quarter of 1 percent, which is a very tiny baby step. So in the short term, most Americans won't notice much difference at all.

NARIMAN BEHRAVESH: The facetious part of me would be tempted to say big deal.

ARNOLD: Nariman Behravesh is chief economist of IHS Global Insight. He says the Fed is signaling here that it's going to move very gradually to keep raising rates. So a couple of years down the road people might notice that more when they go to get home loan or an auto loan. But for now, many other things will be a bigger deal for most people, like whether wages go up and gas stays cheap.

BEHRAVESH: The big drop in gas prices has probably - puts about $1,000 to $1,200 back in consumers' pockets. That an annual number. So the stimulus from that drop in gasoline prices is huge. I mean, it's really very, very big. It's a big tax cut for most households.

ARNOLD: So the big takeaway from this historic rate hike - Janet Yellen says it's a small change but evidence of sustained improvement in the economy. Chris Arnold, NPR News.

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