The Fed raised interest rates this week, with an expected two more increases to come later this year. The increases, according to an article appearing in The New York Times (NYT) and the head of the Fed, Jerome Powell, demonstrates the confidence in the current strength of the country’s economy. Yet to temper the good news of low unemployment and a growing economy, there is also the bit Powell refers to as a “puzzling” lack of demonstrable wage growth. BAM looks at the rate hikes and what the pros say.
Raising Rates a Positive Reflection
The Fed raising rates shows officials’ confidence in the current state of the economy. They assume that the economy is strong and stable enough now, years after the Great Recession, for borrowing costs to go up without cutting off current economic growth. According to the NYT piece, Jerome Powell said that he believed that the economy had leveled since the ’08 recession and soon the Fed could step back and take less of an active role in helping stimulate the economy. Although rising interest rates are due to positive changes in the economy, they also mean higher borrowing costs for mortgages, loans, cars,and credit cards, as the NYT pointed out – as the rates rise faster than anticipated.
Return to Normal
This marks the seventh increase since the Great Recession – all of which are moving the Fed benchmark rate back to a 1.75-2 percent range. According to the NYT, the last time the Fed benchmark rate sat at 2 percent, it was 2008 and the Fed began slashing rates close to zero where they’d stay for the years leading up to the current period. The interest rate increases this year are part of the Fed’s plan to get the inflation rate to its 2 percent target, as well as a vote of confidence in the country’s economic strength. This attempt to return to normal must be a delicate balance; the Fed will try to increase rates without halting growth, but check inflation so that rampant inflation doesn’t instigate another crash.
Unemployment Down but Workers’ Wages Aren’t Up
According to the NYT, Jerome Powell praised the state of the economy and noted that most people looking for work are able to find it – thanks to a robust employment rate. Unfortunately for many of those same employed workers, their wages have not kept up with rising cost-of-living rates. In theory, a tighter job market should create wage growth as companies compete for workers. The NYT quotes a Consumer Price Index as showing that rising consumer prices have negated any raises gained by non-supervisory workers. Per the NYT piece, Powell has commented that while this effect is currently puzzling, he believes wage growth will pick up over time as the economy continues to gain strength.
As the NYT noted, Jerome Powell is signifying an open, conversational style with more frequent status reports than in previous years. The current Fed outlook is practical but optimistic, as they will try to prevent the economy from both overheating and crashing; two more interest rate increases are anticipated this year – which is up from a previous year-estimate of three total to its current four.