Why You Should Be Concerned by the Fed’s Interest Rate Hike
PERI Co-director Gerald Epstein says while the interest rate hike is meant to demonstrate the growing strength of the US economy, it could actually end up slowing it down
SHARMINI PERIES, EXEC. PRODUCER, TRNN: It’s the Jerry Epstein report on the Real News Network. I’m Sharmini Peries coming to you from Baltimore.
The Federal Reserve in the U.S. announced its first interest rate hike in over seven years. It said that current labor market conditions have influenced their decision. The business press is claiming that this ends the debate on whether the U.S. economy has sufficiently recovered since the Great Recession of 2007-2009. Here are some of the comments made by federal chair Janet Yellen.
JANET YELLEN: This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis in recession since the Great Depression. It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes, and easing the economic hardship of millions of Americans. And it reflects the committee’s confidence that the economy will continue to strengthen.
PERIES: To explain all of this we’re joined by professor of economics Gerald Epstein, who is also the co-director of PERI, the Public Economy Research Institute at UMass Amherst. Jerry, thank you so much for joining us.
GERALD EPSTEIN: Hi, Sharmini. Thanks for having me.
PERIES: Jerry, some considerable misconceptions about the decisions today, whether this is good for us. Let’s get some clarity on it by getting your take on it.
EPSTEIN: Well, in some ways this is a big move. Not quantitatively, but qualitatively. As you said in the intro, the interest rates determined by the Fed have been held close to zero since 2008, at the start of the crisis. And this is the first step of the Federal Reserve raising interest rates. It’s, it’s very–it’s an important thing because the financial markets and politicians have been pressuring the Federal Reserve, pressuring Janet Yellen, for months now to start raising interest rates.
And the, the chair of the Fed, Janet Yellen, has been reluctant to do that because she recognizes the, that in some ways the economy is still weaker than it should be. That the employment to population ratio, the percentage of people who could be working, but the employment to population ratio is still very low. There are a lot of job-seekers who are still trying to find jobs but can’t find full-time jobs even though they want them. Wage growth is, is almost nil. It’s very low. So I think Janet Yellen recognizes that there are these weaknesses in the economy, yet the pressures have been so relentless from the financial markets, the bankers, and others to raise interest rates, that I think that finally she has relented and decided that she has to at least make some concessions to them and raise interest rates a little bit.
PERIES: And will this have any implication on household debt?
EPSTEIN: Well, what she said in her press conference today after the decision and in the statement is that they’re raising the short-term interest rate by a quarter percent to a half percent, which is really not very much in the scheme of things. And she also said that she wants the rate of increase over time to be relatively slow. She claims that monetary policy is still expansionary, and as a result of that she’s hoping that it will facilitate the increase of employment and so forth.
But the logic that, that she’s representing and that the Federal Reserve is representing is so twisted, it’s so convoluted, it’s like taking a pretzel and putting some extra twists in it. Because what everybody knows is that when you raise interest rates, that eventually will start slowing the economy. When you raise interest rates that’s eventually going to start raising unemployment. When you raise interest rates it’s going to make it harder for workers to increase wages. So it’s going to move the economy in the wrong direction, but what she has been saying and what the committee said in the statement is that this is a sign of strength. You play this clip, it’s a sign of strength of the U.S. economy. It, it’s a sign that things are getting better and will continue to get better. It’s an accommodative or expansionary policy when in fact it’s starting to move in exactly the wrong direction.
So to my way of thinking, what Janet Yellen is doing is trying to put a positive face on it in hopes that she can dig in and prevent the increase from being too rapid and too high. But the logic that they’re using to defend this, this increase just will not hold water.
PERIES: Right. And a lot of business press is reporting this as a cautious effort into a gradual tightening cycle. First of all, what does that mean?
EPSTEIN: Well, I think businesses, there’s a split, probably, in business. I imagine the manufacturing firms, especially those that want to export, are concerned about this. Because there’s a big divergence in the way monetary policy is going on this side of the Atlantic by the Federal Reserve, and on the other side of the Atlantic, by the European Central Bank.
The European Central Bank is lowering interest rates, and is going to–sending interest rates into negative territory by actually charging banks and others to, who want to hold money. So it’s actually charging negative interest rates. Whereas the Federal Reserve is raising interest rates. This divergence is going to continue probably, all things, else equal, it will continue to raise the value of the dollar. And when the value of the dollar goes up, that’s going to make it harder for exporters to export and make it harder for domestic businesses to compete with foreign businesses from China and elsewhere.
So the manufacturing firms, especially those involved in exports, I think are quite concerned about this. Most bankers, on the other hand, have seen that their interest rate margins, that is, how much they can charge for loans and so forth, relative to what they have to pay for deposits, have been shrunk. The margins have been shrunk, so the profits have been shrunk. And whereas for a while they were gaining quite a bit from–at least the big banks were, from stock market increases and bond price increases, now that has sort of worn off. So now they’re very concerned about the shrinking interest rate margins. So they’ve been agitating for increases in interest rates.
So apart from those banks that perhaps have invested a little bit too much in junk bonds and things like that, whose values might go down as a result of this, they’re probably pretty happy that this so-called normalizing of interest rates, that is, increasing of interest rates, is going to happen. I think that workers and people who want to take out mortgages on their houses, and have to pay credit card loans and student debts, this is not a happy day for them.
PERIES: And, and how will that transpire?
EPSTEIN: Well, when the Federal Reserve raises interest rates–again, this is a small increase. But if it continues to do this, then that ratchets up all other interest rates. So interest rates on mortgages, interest rates on car loans, interest rates on student loans and so forth, over time will continue, will go up as Federal Reserve interest rates go up. And moreover, as the unemployment–as the economy slows, that’s going to make it harder for workers to get jobs, to bargain for higher wages, and so forth.
That’s not going to happen immediately, because the interest rate increase that they announced is quite small. But if they continue moving in this direction, as many members of the Federal Reserve want them to–I don’t think Janet Yellen wants to do this, but she’s under a lot of pressure. If they continue to work, move in that direction, I think it will slow the economy and will hurt the vast majority of Americans.
PERIES: Jerry, I want to thank you so much for joining us and explaining this decision to us, and hope to have you back very soon.
EPSTEIN: Thanks a lot.
PERIES: And thank you for joining us on the Real News Network.
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