The Fed and US Interest Rates
The Federal Reserve wants to see that we’re operating at maximum employment with stable prices while maintaining moderate interest rates. The Fed’s primary objective is to encourage steady GDP growth while keeping inflation in check. Simply put, the Fed lowers interest rates when jobs are scarce to make it favorable to borrow money; it raises interest rates when the economy is strong to make it favorable to save money.
What’s Better: Up? Down?
With January’s rosy job market report of 151,000 new jobs, and the unemployment rate down to 4.9 percent*—the lowest it’s been in 8 years—these figures will very likely give the Federal Reserve the good economic bill of health that will merit the raising of interest rates beyond its December 16, 2015 quarter-percent hike for the first time in a decade. With the economy continuing its recovery from the Great Recession, some experts believe that the Fed may no longer need to rely on financial crisis emergency policies of near-zero interest rates.
However, not all economic analysts agree. Gloom and doom predictors suggest that the gains we see are only temporary, and that we are in fact at risk of sliding into a recession. The result could force the US to set negative interest rates before the election (as the Bank of Japan recently did), in order to encourage more borrowing as a way to pull out of a deflationary spiral.
What’s Most Likely to Happen…
We can probably expect to see interest rates raised by at least another quarter of a percent as early as March, and possibly by as much (or more) as 1 percent before the election. Federal Reserve Chair Janet Yellen promises to remain cautious and keep an eye on the continuing US economic upswing while monitoring global financial and economic developments and their impact on the US (before raising rates again). And when the Fed approves rate hikes after that, we can probably expect to see an “easy does it” approach, in low, gradual increments.
How Will Interest Rates Impact Presidential Candidates?
An economy that appears to be in good shape will be at the forefront of the conversation regarding this year’s presidential election. The unemployment trend is expected to continue to remain low, GDP growth suggests a continuing uptick from the 4th quarter 2015 rise of 0.7 percent, hourly earnings are on the upswing, and interest rates should trickle upward. Historically strong economies bode well for the incumbent—but with no incumbent in office, all candidates may spin economic rhetoric in their favor. If the Fed raises rates too quickly, the results could backfire and result in volatility in the financial and housing markets—all of which will be fuel for the candidates stumping for votes.
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*Bureau of Labor Statistics (2/5/16)