The Fed just raised interest rates — and Trump’s plan for the economy could suffer
The U.S. central bank raised interest rates Wednesday for the third time since the Great Recession, effectively tapping the brakes on a U.S. economy showing strong momentum.
The idea of the government intentionally slowing the economy — raising interest rates slows things down, lowering them hits the gas — might sound odd to some. And for Trump supporters who see everything in stark, political terms, the Federal Reserve’s move to lift interest rates — by 0.25 percentage points — could be a frustration. It’ll likely make Trump’s promise to raise the annual economic growth rate to 4 percent more difficult to deliver.
But the decision seems fairly logical. And it’s in keeping with what the Fed has said it would do for years.
Tapping the brakes is part of the Fed’s job. By law, the Fed has to balance two big concerns: employment and prices. During the Great Recession and the slow growth period that followed it, employment was the big problem. (Unemployment peaked during the recession in October 2009 at 10 percent.)
But that was then. Now, the jobs picture — while not completely perfect — is much better. The unemployment rate has fallen to 4.7 percent. The labor force is growing. The participation rate, while still low, is starting to move higher. The number of discouraged workers who’ve stopped looking for work has dropped. Wages are starting to tick up.
Meanwhile, prices are moving up too. The Fed’s key metric for watching price increases— the U.S. price index for personal consumer spending, excluding energy and food costs — hit 1.7 percent in January, not far off the Fed’s target of 2 percent. Other gauges of inflation, like the Consumer Price Index, are a bit higher.
Faced with a much-improved job market and prices that are moving slightly higher, the Fed is saying it makes sense to raise interest rates a bit. For the record, they’re still very low by historical standards, which means the Fed is still helping the economy a lot.
Still, the Fed’s decision to lift interest rates in December was met with plenty of squawking by some ideologically extreme Republicans. (Many of these people spent years screaming that the Fed kept interest rates too low under President Obama.)
Such blatantly political people should be ignored. In normal times, an interest rate hike like this would be no big deal. But, well, Donald Trump is president.