The Fed’s rate hike shows it’s confident in the economy Obama is leaving to Trump
The Federal Reserve raised interest rates on Wednesday for only the second time in a decade. It’s a sign of growing confidence in the economic expansion that Donald Trump is about to inherit from President Barack Obama.
The U.S. central bank increased its key monetary policy rate, known as the Fed Funds rate, by 0.25 percentage points, matching the increase the Fed applied roughly one year ago.
By raising and lowering interest rates, the Fed exercises significant influence over U.S. economic growth. When the economy is slow, the Fed lowers rates, which cuts the costs of consumer borrowing on cars and homes and stimulates corporate investment.
When the economy is running strong, the Fed often raises rates to prevent runaway inflation — destabilizing price increases that make people worse off by cutting the purchasing power of paychecks.
Since December 2008, the Federal Reserve has kept interest rates near zero in an effort to support economic growth during and after the financial crisis and Great Recession.
And due, in part, to the Fed’s ongoing efforts — which included interest rate cuts and other more arcane policies such as creating money and using it to buy U.S. government bonds — the economy has made significant progress.
The unemployment rate — which hit 10 percent in October 2009 — has declined steadily, reaching 4.6 percent in November, the lowest its been since 2007. And the economy has generated new jobs for 74 consecutive months, the longest stretch on record. Corporate profits are high. Consumer confidence has improved. Inflation is low.
“President Obama’s handing over to President-elect Trump is just about as good as the economy has been since any time before the financial crisis,” said David Stockton, a former chief economist at the Federal Reserve who is now a senior fellow at the nonprofit, nonpartisan Peterson Institute for International Economics in Washington.
Ostensibly that seems like good news for Trump, indicating that he’s coming into office with a significant economic tailwind. But it also means that any slowdown in the economy, will belong to Trump and Trump alone.
But economic policy won’t be decided by Trump and Trump alone. Information released as part of the Fed announcement Wednesday showed that the Fed was planning lift interest rates at a slightly faster pace than previously expected.
There’s an old saying that economic expansions don’t die of old age, they’re murdered by the Fed. It’s far from always true, but interest rate increases usually do serve to slow growth. And Donald Trump has — in bombastic fashion — called for faster U.S. gross domestic product-growth. All else equal, Fed rate hikes would be working in opposition to those goals.
That could set up a showdown between a Trump administration and an independent Federal Reserve run by Obama-appointee Janet Yellen, whose term runs until 2018.
“I do intend to serve out my four-year term,” Yellen said at the press conference following the bank’s rate decision Wednesday.