Back in mid-December, the United States Federal Reserve raised interest rates for the first time in almost 10 years. This is a controversial move any time it happens, but this time around the Fed’s decision is particularly divisive.
And that might be surprising for some, since the rate hike we’re talking about is just a quarter of a percentage point: 0.25 percent versus 0.50 percent. So why all the fuss?
Whenever the Fed does hike interest rates, it’s ostensibly to signal that the United States economy is in good shape. So here’s the question: Is the US economy in good shape? Is the unemployment rate really in decline? Let’s take a look at the facts to answer these questions, and more. But first, let’s take a crash course in what the Fed actually does, and how it can affect our lives in a very personal way.
What Goes On At the Fed?
Most Americans are comfortable in their ignorance of what the Fed does and how it works. I don’t mean that disrespectfully; until relatively recently I, too, assumed that the goings-on at the Fed wouldn’t impact my life in a personal way. How wrong I was.
To help disabuse us of our ignorance, former US Secretary of Labor Robert Reich put together a five-minute video that perfectly elucidates what the Fed does, and why, and whether raising interest rates right now is a good idea for America’s still-struggling economy.
Here, in brief, are the basics of how the Fed oversees interest rates.
- Low Interest Rates: When the Federal Reserve keeps interest rates low, it’s because the US economy is struggling. Low rates means it’s easier for small businesses and individuals to borrow money, which creates a more active economy. In short, we’re paying less to the big banks and more towards the things we need to a) survive or b) grow our new business. In turn, wages tend to rise, which benefits everyone — no matter where we are on the socioeconomic ladder.
- High Interest Rates: When the Federal Reserve raises interest rates or keeps them high, it’s because the US economy is in good shape. Higher rates means it’s more difficult and more costly to borrow money, and banks receive a greater portion of the money that would otherwise go toward personal or business expenses. In short, we pay more toward our debts than we do when rates are low. This in turn means job creation slows, which means there’s little or no incentive for employers to raise wages.
So here’s the question: Why would the Fed choose to raise rates now, when the economy is still struggling to get back on its feet? And make no mistake: It’s definitely struggling.
Fed Predictions vs. Reality
One reason is because the Feds are anticipating rising inflation. Unfortunately, it seems as though the prognosticators over at the Fed may have jumped the gun, because it seems as though inflation will be sharply lower in 2016 than previously believed.
Here’s the short version of this particular bullet point: Inflation is not a concern at this time, and prices for all kinds of products are generally, and relatively, low across the board — except in industries with little intrinsic competition, such as Internet service providers and airlines. So, again, the same question: Why raise interest rates now, if inflation is of little concern?
Another reason for the Fed’s decision could be that unemployment is finally leveling off or in decline. As we learned above, higher unemployment can be countered, at least in part, by keeping interest rates low.
And if you believe some of the numbers floating around out there, it might seem likely that the US economy has not just rebounded, but is improving rapidly. Unfortunately, it’s not the whole picture.
We know the US economy is still in trouble because the official unemployment rate of 5.1 (as of September 2015) does not reflect the numbers of underemployed Americans, or those who have simply given up looking for work. The metric that the Bureau of Labor Statistics uses to collect each of these trends (“total unemployment, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force”) is called the U-6 rate. And currently, the U-6 rate in the US is far above what it was even before the Great Recession. As of November 2015, it was 9.9 — nearly twice the “regular” unemployment rate you hear thrown around a lot on the campaign trail.
Meanwhile, 53 percent of recent college graduates are either underemployed or jobless, 51 percent of African-Americans are unemployed, the United States in general is home to the highest youth unemployment rate of any developed country anywhere in the world, and America’s labor force participation is the lowest it’s been in 35 years. Moreover, the median income of the average working American is six percent lower than it was before the Great Recession of 2008.
Literally any way you measure it, the US economy is struggling.
So let’s ask the question a third time: Why raise interest rates now? The Fed’s ongoing balancing act between keeping inflation low and encouraging employment is a difficult one, to be sure, but virtually all of the available evidence, as we’ve just seen, would suggest that their attention should be turned toward the latter, rather than the former. But that’s not what they’re doing. And it has Robert Reich worried, along with many, many other brilliant economists as well.
This decision might have something to do with the fact that the Fed has traditionally been chaired, directed, and overseen by former and current banking executives — one of the few demographics in America that consistently benefit from higher interest rates — but that’s an article for another day.
For now, let’s focus on what comes next. The Fed’s recent decision to raise interest rates would have us believe that unemployment and underemployment in America are being overcome, or at least being addressed in a systemic way. And for the record, some of the credit claimed by President Obama over the last few years rightfully belongs to him. In fact, historical evidence suggests that the US economy almost always does better under a Democratic or Progressive president than it does under a Conservative one.
But if this article has convinced you of anything, it’s that America’s recent heartening gains are not nearly enough to have given the Fed so much cause for optimism. And with a Presidential election fast approaching, we owe it to ourselves to elect leaders who represent working Americans — not banking executives and billionaires.
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