Fed Expected To Raise Interest Rates For The First Time Since 2008
DAVID GREENE, HOST:
We've been talking for a long while about when this day might come. The Federal Reserve is now expected to announce it's raising interest rates for the first time in nearly a decade. Short-term interest rates have been kept at zero for seven years now. It's one way the Fed has tried to reignite the economy. We're turning now to David Wessel. He runs the Hutchins Center at the Brookings Institution. He's a contributed correspondent to The Wall Street Journal. And David, I've got to say, I feel like every time we've had you on the program the last few years it's like, so could this be the time that the Fed's going to raise interest rates?
DAVID WESSEL: (Laughter) Right. Waiting for the Fed to raise interest rates is a little bit like "Waiting For Godot." But...
GREENE: (Laughter) But I mean, it seems like there's no suspense this time. It really sounds like it's going to happen this afternoon.
WESSEL: Yeah. I mean, the Fed has made very clear that they're going to raise rates this afternoon. About the only thing they haven't done is send out Chairman Janet Yellen with a big, 6-foot-tall, upward-facing arrow and install it like a Christmas tree...
GREENE: (Laughter) Maybe that's still coming. Maybe it's still coming.
WESSEL: I think the reason is that they know that big changes in monetary policy, like raising rates for the first time in more than a decade - or almost a decade - is - could really unsettle markets. There could be an overreaction. So this time, they don't want there to be a lot of suspense. And I think they've achieved their goal.
GREENE: OK, so now that it looks like it's going to happen, what exactly does it mean for consumers, for businesses, for the whole economy?
WESSEL: Right. So the Fed is expected to raise rates only a quarter of a percentage point this afternoon. And that alone doesn't matter much to the economy. It might matter to some bond traders. But there's a lot of focus on what the Fed says about rates going forward, what it says in its statement, in Janet Yellen's press conference and in some projections that Fed officials will release this afternoon. And when they say what's going to happen to rates in the future, markets respond to that in real time. And that affects what we pay for car loans and mortgages. It effects what we get on our savings accounts, on our money market funds. Now, right now, economists expect the Fed to signal that they're looking at interest rates going up to about 1 percent by the end of next year. But if they say something today that changes that view, then rates could go up more.
GREENE: Well, David, help me understand something if you can. What we've heard from Janet Yellen and from others is the Fed really wanted to be convinced that the economy's fully recovered before doing this. I mean, it doesn't look like it is. Yellen has said that wages aren't rising. Inflation is below what the Fed wants it to be. It - you know, at 2 percent - so why now?
WESSEL: Well. I think the economy has improved a lot since the Fed cut interest rates to zero back in 2008. The official unemployment rate was 10 percent. Now it's down to 5. It's headed towards 4 and a half percent. Broader measures of the job market have also improved. The economy's creating 200,000 jobs a month. There are some hints of wage increases. Look, the point is that the economy responds to monetary policy with a lag. And the Fed is lifting its foot off the accelerator now so we don't end up with too much inflation later or we don't end up with some kind of borrowing-binge acid bubbles that we regret down the road. So basically, the reason for raising rates now is if not now, when?
GREENE: Sounds pretty clear. But can a case be made that this might be premature?
WESSEL: Absolutely. And it's interesting. Some people inside the Fed have been arguing that maybe we should wait. They argue that the economy's better, but there's still a lot of people who would like to work if only the job market was better. They point out, as you did, inflation is much below the Fed's 2 percent target. There's all sorts of things going on in the rest of the world that could slow our economy. So they say that the risks of moving too soon far outweigh the risks of waiting a bit longer. And their case is basically, what's the rush, guys?
GREENE: In just a few seconds left, David, I mean, if this doesn't go well, how will we know?
WESSEL: One, the timing could be bad. The economy could falter and the Fed could have to backtrack. Markets could overreact, as they often do. And we could also see ripple effects abroad, maybe even tidal waves because what happens here, to rates here in the U.S., often has a very big effect on exchange rates and interest rates all around the world. And that feeds back to our economy.
GREENE: OK, David, thanks as always.
WESSEL: You're welcome.
GREENE: David Wessel runs the Hutchins Center at the Brookings Institution. And he is a contributing correspondent at The Wall Street Journal. Transcript provided by NPR, Copyright NPR.