Fed Watchers Expect Short-Term Interest Rates To Rise Soon
STEVE INSKEEP, HOST:
The Federal Reserve is widely expected to raise short-term interest rates today. Interest rates are very low, have been low for years, have only been raised once since the Great Recession, so this is a big deal. And when there is an economic big deal, we call in David Wessel, director of the Hutchins Center at the Brookings Institution and a contributing correspondent to The Wall Street Journal. David, good morning.
DAVID WESSEL: Good morning, Steve.
INSKEEP: Always risky to make predictions, so what evidence is there that rates will rise, if they do?
WESSEL: Well, at the moment, the Federal Reserve seems to have a policy of avoiding surprises. And it has sent every possible signal that they're going to raise interest rates this afternoon by a quarter point. They'll still be pretty close to zero - between half and three-quarters of a percentage point. Unemployment is below 5 percent - well below now. Wages are beginning to rise at last. Inflation is creeping up to the Fed's 2 percent target, so they think it's time to move a little bit further from zero.
INSKEEP: And let's remind people of the significance of those numbers. The Fed wants to encourage low employment if they can, but they want to absolutely keep inflation from getting too high. So as inflation goes up, unemployment goes down. That's when they start saying, let's raise interest rates, let's make it a little harder to borrow money.
WESSEL: Exactly. And what they're saying is, basically, this is going to be the beginning of a process. So the markets expect another two or perhaps three quarter-point increases in interest rates over the next year, but a lot depends on what happens to the U.S. economy, which seems to be doing better, what happens to the world economy, which seems to be doing worse, and what President-elect Trump and Congress actually do in the end.
INSKEEP: Well, let's figure out that part of it because the Fed is supposed to be independent of politics, but don't they have to take into consideration how much the government - how much any new president spends, how much any new Congress spends, whether they have a big deficit or a smaller deficit, all those kinds of things?
WESSEL: Exactly, and the picture has changed a lot since the election. Most people in Washington and the markets expect a tax cut, an increase in spending on defense for sure, maybe on infrastructure. And so, in the short run, that'll give the economy a little more oomph. And that's leading people to think the Fed may raise interest rates a little faster than had been expected before the election.
INSKEEP: Why, because they worry about a little too much oomph, as you put it? That's a...
INSKEEP: That's an economic term, right, oomph?
WESSEL: Exactly, a technical term.
INSKEEP: Yeah, go on.
WESSEL: Yes, they think that - they're afraid that the - we're now at the point where they - the economy is so close to full employment that they'll get more inflation than they want, so they're gradually taking their foot off the monetary accelerator. Interest rates are still pretty low, but they're - but they're starting to go up. Mortgage rates, for instance, which were 3.5 percent on a 30-year mortgage earlier this year, are now well above 4 percent. So interest rates on savings and borrowing are going to go up a little bit over the next year if the economy unfolds the way the Fed expects.
INSKEEP: Trump's advisers have been on this program. We've heard them say, well, the economy's growing, but the growth is slow. We want faster growth. We want Ronald Reagan-style growth. It sounds like the Fed is thinking in a different way.
WESSEL: That's right. I think the Fed would like to see steps that make the economy grow faster over time, but they don't think it needs a lot more fiscal juice. That's another technical term right now.
INSKEEP: OK, so how much influence is the new president likely to have over the Federal Reserve?
WESSEL: Well, he's not going to have much in the short term, but he's going to get a chance to remake the Federal Reserve Board. There are two vacancies on the seven-member board now, and the terms of Janet Yellen, the chair, and Stan Fischer, the vice chair, end in early 2018. So there's a lot of speculation about who might be on Mr. Trump's short list for Fed chair. The most interesting - retired major league ball player Jose Conseco tweeted at Mr. Trump this week and volunteered for the job. Give me control of the Fed, he said, and we will make the economy great again.
INSKEEP: (Laughter). Campaigning by Twitter. He knows the medium to get these things done.
WESSEL: He sure does. It would be interesting to cover a ballplayer as Fed chair.
INSKEEP: (Laughter). David, thank you very much, as always.
WESSEL: You're welcome.
INSKEEP: David Wessel of the Brookings Institution and The Wall Street Journal. Transcript provided by NPR, Copyright NPR.