Federal Reserve Hikes Interest Rates - First Time Since Great Recession Began

For the first time in seven years, since the Great Recession began in 2008, the Federal Reserve has decided to start raising its interest rate. When the recession began, pushing the interest rates as close to zero as possible was necessary to help the nearly crippled economy. The Fed raising their rates could be seen in a positive light, as a sign of confidence that the economy is getting back on track. To others, it could be a preventative measure in preparation for a future economic downturn. Jim Puzzanghera and Don Lee discuss the implications of the rate hike in their recent article in the L.A. Times.

What was seen by some as a vote of confidence in the recovering economy helped investors to feel more confident, which in turn led the Dow Jones average to rally and close up about 224 points, a substantial increase. When the Fed decides that the economy can handle an interest rate increase, this helps the average person to believe that they can more easily trust the economy to keep their money safe. This leads to more investment, which can help the economy even more on its path to recovery. When people believe in the power of the economy, it is more able to grow and meet their expectations.

On the other hand, the increase of the interest rates might be an indication of future trouble for the economy. When the economy is struggling, when the market crashes or a recession hits, the Federal Reserve is able to lower interest rates, which can lessen the impact of the economic downturn. However, if the rates are already near zero and a recession begins anew, lowering the interest rates will have no effect because they are already too low. So, if the Fed raises the interest rates now, the government can start building up revenue so that if and when the economy slows again, they can lower interest rates and pump money back into the economy to give it a jumpstart.

This decision by the Fed, although seen as "historic" by economists, will likely have little effect, at least for the time being. The benchmark federal funds rate, which affects consumer and business loans, has only increased by 0.25%, and the Fed has promised that increases in the future will come slowly. Loans on automobiles and the interests rates on credit cards will probably begin to rise slowly in the coming months, and mortgage rates have already risen slightly. Small businesses, which have been more affected by the Great Recession than their larger competitors, have shown support for the raising of the interest rate, seeing it as a step on the way to a more stable economy. After all, at this point, a quarter of a percentage point does very little to harm business growth and could do much for the future of the economy.

The rate hike has been viewed by many as the turning point for the economy. It may signal an end to the worst of the recession and a new beginning for the economy. The rates, which will grow slowly, at first, are expected to reach 1.375% by the end of 2016, which is pretty low in the grand scheme of things. In fact, the interest rate was over 5% before the Fed started lowering it due to the Great Recession. By some measurements, unemployment is down to 5%, which means that the rate hike could be necessary in order to reduce inflation. Out of fear for issues in the global economy, the Fed decided not to raise rates in September, but since then has decided that the rate hike is exactly what the US economy needs right now.

Some economists believe that the increase is a ploy by the Fed to simply fulfill a promise that was made to raise the rates by the end of the year. Whether this was the Fed's intention or not, it doesn't matter because the rates have gone up and will continue to increase. All agree that the interest rates, when increased again, should go up slowly, so as to not stifle any economic growth that they may cause. While some still fear that the rate hike is a way for the Fed to handle "negative shocks" in the economy, the Federal Reserve Chairwoman, Janet Yellen, assures the American people that the economy appears to be stable for now. She believes that the economy will continue its growth in the future and that the American people should see the rate hike in a positive light.

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Lowering Interest Rates: A Continuing Trend?

7/14/14 - Interest rates are a large part of measuring an economy's strength, stability, and ability to recover. For the average American, there is no ideal interest rate; it all depends on one's status. For older Americans, relying on the interest accrued from a pension fund or savings account, low interest rates can be devastating, helping very little to increase their principal investment. On the other hand, low interest rates can mean lower mortgage rates, more affordable loans, and improvement of the stock market. In his article, Tom Petruno of the Los Angeles Times investigates interest rates, their effect on the economy, and predictions of future changes.

In most countries, the interest rates are controlled by a main federal banking organization: the Federal Reserve, the European Central Bank, or the Bank of Japan, to name just a few. These organizations command changes in the short-term interest rate, and as of recently, have been holding them as low as possible, in an attempt to stimulate economic growth in the form of real estate, corporate loans, and stock market investment.

Although the Federal Reserve publicly predicts interest rates to be up to 2.5% by 2016, several members of the policy committee remain skeptical as to the magnitude of this rate increase. While they disagree as to the amount, they seem to concur as to one main idea: America of the post-Great Recession era will take quite a while to regain its previous economic stature. Of the many sources Petruno cites in this article, one message stands out: don't rely on a return to “normal” interest rates, for the economy still has a ways to go.

While central banks control short-term interest rates, such long-term rates as on bonds are affected more by the principle of supply and demand. As demand for bonds decreases, the banks offer higher interest rates as an incentive to increase demand, and as demand increases, banks have more leeway to lower interest rates without affecting sales too drastically. Thus, the interest rates on bonds have been falling lower and lower due to increased consumer demand for such “safer” investments.

According to Petruno, even though interest rates have been at all-time lows, inflation could reverse this trend. As prices and wages increase, long-term interest rates could be driven up markedly by bond investors. According to the Federal Reserve, the current national inflation rate is at target levels, around 2%. While some analysts believe that the inflation rate will continue to increase, in the long run, it appears to remain steady, especially given that wages aren't increasing along with the costs of goods and services. Due to high unemployment, and a dramatic shift to more part-time work, the current rise in prices is predicted to decrease, given that lower wages can't fuel a sustained increase in costs.

In concluding the article, Petruno brings up the following point: while the funneling of money into central banks has not, as of yet, triggered a dramatic improvement in the national economy, such an improvement due to this money could have negative consequences, namely high inflation. It seems like the solution to fixing the American economy relies mainly on time and patience. Interest rates are slowly climbing, and the economy appears to be healing, albeit slowly. Thus, all we can really do is watch and wait.

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