In a statement, the central bank noted that the labor market has continued to strengthen and economic activity has continued to expand at a moderate pace, while also pointing to an uptick in job creation, household spending, and the unemployment rate. “The simple message is the economy is doing well,” Federal Reserve Chair Janet Yellen said at a press conference.
We asked William Dickens, University Distinguished Professor of Economics and Social Policy and chair of Northeastern’s economics department, to weigh in on the Fed’s decision and what it means for average Americans, including students and young alumni.
What is your assessment of the rate hike and the conditions that allowed for it?
I think it’s a sign, as Yellen said, that the economy has been a bit stronger than what the Fed was expecting back in December. The rate of job growth has continued at a normal pace. The unemployment rate is down. Some numbers are at historic lows—the number of new claims for unemployment insurance is at a level we haven’t seen since the 1970s, and the labor force is larger now than it was then. We aren’t at full employment right now, but the Fed’s low interest rate policy was meant to get us out of a recession and not meant to be permanent.
Consumption spending is one of the largest parts of the economy. When that is going strong, then the rest of the economy is likely to be going strong as well. The other thing is that there really isn’t a sign yet of any increase in inflation, which would be a basis for arguing against rate increases right now.
The Fed indicated that it plans to increase rates two more times in 2017 and three more times in 2018. What does this signal?
What it signals is that the Fed is fairly confident that we are back at normal economic growth under normal conditions after the recession and that we will remain there for the foreseeable future. As such, it plans to bring interest rates back to where they were historically in the past. Treasury bill rates would’ve been in the 2 or 3 percent range.
How do you expect this rate increase will filter through the economy? In particular, how will it impact average Americans including students and young alumni?
Interest rates tend to be tied together. They don’t all necessarily move by the exact same amount, but when the Federal Reserve moves its rate it affects other rates as well. It affects treasury bills, it affects bonds that are offered by firms, and it affects lending and borrowing. That means people who will be taking out mortgages in the future will be paying higher rates. Car loans will be more expensive. But on the other hand, you’re likely to earn more on your certificate of deposit or your bank account.
For students and young alumni, the first thing they’re likely to encounter in terms of major purchases is car loans. It may affect students who are taking out new student loans [for the next academic year]. Some credit card rates may rise too.
Yellen said the Fed hasn’t discussed any potential policy changes under the Trump administration or mapped out what the response would be, though she said the Fed would have time to adjust to such plans. What economic developments might play into future Fed decisions?
A big tax cut or infrastructure program would make the Fed sit up and take notice, and either scenario would increase the rate of economic activity in an already fairly tight labor market. That would be something that would possibly reignite inflation. In fact, there was some speculation that it was in anticipation of the infrastructure bill Trump had talked about during the campaign that led the Fed to the interest rate increase in December. But one of the things that Yellen was trying to signal with her statement Wednesday is that the Fed hasn’t been taking into account government policy. A big move by the federal government to increase or reduce the budget deficit is likely to be something the Fed will have to take into account.