Federal Decision to Raise Funds Rate


The Federal Reserve’s decision to raise its benchmark federal funds rate to a range of 2.25% to 2.5% on Wednesday and projections for up to two increases in 2019 are already prompting deep concern. But these fears are vastly overblown. The last time it was this low was more than 10 years ago — when the Fed cut from a range of 3.00% to 3.25% on March 18, 2008. It wasn’t long after that rates effectively hit zero — for seven years.

Despite growing talk of an impending recession, the American economy continues to hum along nicely under President Trump. While the Atlanta Fed’s most recent projection suggests 2.9% GDP growth for the fourth quarter — less than the 3.5% rate of the third quarter — the economy, as Federal Reserve Chairman Jerome Powell put it Wednesday, is “very healthy.”

Unemployment remains at historic lows of 3.7%, and payrolls already surpassed 2017’s total gains at the end of November. Moreover, the Labor Department’s monthly JOLTS report consistently demonstrates that there are nearly one million more job openings than workers in the workforce currently seeking employment. There’s still room for the labor force participation rate to go up among prime-age workers, but we have a vigorous job market.

The bottom line is positive for today’s U.S. economy, and a recession seems hardly imminent. Still, concerns about the challenges that could help to slow the progress are justified.

Moreover, no one should exaggerate the influence of Fed policy on the economy. If low rates really were the be-all and end-all of economic growth, why are growth expectations for the European Union so low despite negative benchmark rates since 2014? How about Japan? Shouldn’t credit be flowing and their economies growing by now, if the big boon is to cut rates and the big devastation is to raise them now?

It is worth noting Chairman Powell’s indication that there is “a fairly high degree of uncertainty about both the path and the destination of any further increases.” Thus, if growth slows and unemployment rises, the Fed could and would alter its trajectory. Hence, future rate increases will rightly be “data-dependent.” Nothing is set in stone.

For now, if ever there is a time to end the decade-long Era of Accommodation and return to, say, only 3.0%, it’s 2019. Even that is historically low and maybe not actually “neutral.” More importantly, today’s strong economy can handle a couple more quarter-point bumps — spaced out at least quarterly.