In what may be the most telegraphed monetary policy move in history the Federal Reserve raised rates today by 0.25% (here is an article). The great wailing and gnashing of teeth predicted by all the Chicken Littles seems not to have come to pass though. I have been saying this on JT’s show for the better part of a year now: If the economy is so fragile that a 0.25% increase in rates is a threat to economic growth than we have bigger issues.
Take this to a micro level too. If a business needs a near zero interest rate environment to maintain operations there are bigger issues at that business than monetary policy. Certainly at the margin some businesses will find it more costly to operate any certainly may go out of business, but we need to again question the overall strength of that business before we point fingers at interest rates.
Yellen played up two key points in her comments:
- This is being done to avoid larger increases later, and
- This is being done due to the strength in the U.S. economy.
Let’s consider each of these. Chair Yellen long suggested that people pay attention to the totality of Fed interest rate policy rather than the timing of the first change. By this she signaled clearly the Fed’s intention to gradually raise rates in small increments. The timing of the first increase is important, make no mistake, but it would be a small increase, and there could be some time between the first and second increase to allow for adjustments. So we are on a long, measured path to a more neutral interest rate stance. You might push this into the realm of the “ounce of prevention” adages too. If the Fed waits too long to raise rates increases could be larger to discourage inflationary pressures.
The U.S. economy is not growing the way people want, and there are plenty of mixed signals, but there is growth. There is growth in absolute terms too, not simply relative to other trading partners. The Fed is “confident” in the outlook for the economy as a whole, and that is also useful information. We are neck-deep in the election cycle for President already and there are lots of policy discussions occurring which is a good thing. We need the discussions focused on accurate, relevant numbers. The Fed gave a clear signal of where they see the economy heading.