Today the Federal reserve, or Fed, is expected to raise it’s interest rates. Why is this a big deal? The last time the Fed increased it’s rates was in 2006. To put that in perspective, that’s a full year before Apple released the original iPhone. Those rates control the cost of just about everything, not just investments or mortgages. The price on a pair of jeans at a local shop, or even a coffee is effected by the Fed’s rate.
When the Fed increases interest rates, it raises the cost of many other loans — everything from mortgages to car loans to credit cards. It can affect everything from employer hiring to the strength of the dollar. The fact that the Fed has kept interest rates so low for so long is a reflection of the fact that the economy — both domestically and globally — has been weak for many, many years.
That’s to be expected after an economic meltdown like the one we faced in 2007-08. By raising rates now, the Fed is effectively saying that it believes enough measures of the economy have recovered sufficiently to make borrowing just a little bit more expensive.
Timing is everything when it comes to interest rate increases, which is why the decision is so controversial.
There’s some evidence that the Fed should have raised rates even before now. The stock market has seen record highs and the bond market has seen record low yields. The national unemployment rate fell to about 5 percent in November from a post-recession high of 10 percent. There’s also some bubbly looking activity out there — micro housing markets like San Francisco, for example.
On the other hand, wage growth has been stuck at an anemic 2 percent for years. There’s a large shadow group of underemployedmpeople who aren’t reflected in the official rates. And the risk of global contagion — China’s economy is shaky, South America is facing enormous problems, and no one expects Europe to provide much growth — remains high.
The wisest course, then, is for the Fed to raise rates slowly and surely. December’s increase is a good idea, but the Fed may be cautious about following it with another one. Unless the economy shows big changes over the next few weeks, that may be the right course.