Play Live Radio
Next Up:
0:00
0:00
Available On Air Stations
Watch Live

KPBS Midday Edition

Federal Reserve Raises Key Interest Rate In First Move Since 2015

Federal Reserve Chair Janet Yellen is expected to discuss the central bank's decision on a benchmark interest rate Wednesday. She's seen here speaking on Capitol Hill last month.
Susan Walsh AP
Federal Reserve Chair Janet Yellen is expected to discuss the central bank's decision on a benchmark interest rate Wednesday. She's seen here speaking on Capitol Hill last month.

Federal Reserve Raises Key Interest Rate In First Move Since 2015
Federal Reserve Raises Key Interest Rate In First Move Since 2015 GUEST: Jeff Probst, lecturer, San Diego State University

I am Allison St. John in for Maureen Cavanaugh. As expected the Federal Reserve announced that it will raise short-term interest rates by a 12:45 %. This has been a long time coming and has followed a great deal of speculation about where the economy is going and President-elect Donald Trump's policies. Here to help us understand why it is important and what it means for the average Joe is Jeff Probst from SDSU and vice president and portfolio management. Thank you for joining us. Thank you. We hear that the Federal Reserve has raised interest rates but that does not mean that our savings rates are going to go up today. Went to the feds actually do? The Federal Reserve rate or the federal funds rate which is the shortest duration overnight lending rate to 1/2% in a range of 1/2% to three quarters of 1%. What that is is the shortest rate that the Federal Reserve offers. That does not necessarily mean that your savings account rate will move from zero 2.5% or 1%. There's still a lot of excess money where the banks may not increase your savings rate but this will likely put pressure were maybe potential banks may start offering a positive savings rate for everybody. How long may it be before that happens? There's still a lot of excess cash in the market. Banks are not having any trouble attracting cash. It will take a bit of time until some of that excess liquidity gets pulled down in the market. This could also affect the value of bonds for investors. Immediately after the announcement we saw most of the treasury bonds start selling off. The value of bonds decreased an interest rates increased. Interestingly the long term bonds did not react so there is a flattening and this is right in line with what is going on in the market. So it is based upon expectations of inflation and growth and political uncertainty while the front and is controlled by Federal Reserve. How will that affect things like 30 year mortgage. That affects most people here in the market. It is not going to have a proportional effect just because they raised it it will be 25 races points higher or a quarter of a % higher. Mortgage rates are based on longer treasury rates which is where they base the rate. That is not necessarily controlled by Federal Reserve's in the movement and the federal funds rate. That is more dependent upon inflation and growth. There's a lot of that with the fiscal stimulus they do some tax cuts that are debt funded those will be inflationary and will raise up the long-term rates. The federal funds rate has a low correlation to those real long rates. Here in San Diego where prices are ready and difficult to afford by saying -- It might Lichter a little bit but I don't think it will cause an immediate basis point increase in rate which will make affordability of houses a little bit more difficult given the already higher interest rates. They will start slowing down some of those refinancing and likely slow down some of the purchases as the affordability gets a little more difficult. Are desk and other areas get affected by the rate hike? In the medium-term maybe the shorter rates like audio lending -- auto lending you may not see 0% financing too much longer. If they continue this past of raising some of those short-term rates up you may have to start paying interest when you buy a vehicle maybe one or two or 3% from the dealership. That might start making people question if they want to buy a new vehicle which will honor -- which will affect other parts of the economy. President-elect Donald Trump suggested he would like to see 4% growth coming up which is designed to modify that. Why should the Federal Reserve have concerns about that. 4% growth will depend how that growth will be achieved trigger is achieved through a large fiscal stimulus plan where they will have to issue a lot of debt so you might get growth but it can also spur the bond market. There has to be a buyer for $1 trillion of debt and I don't know if there are buyers that have excess cash to fund that or the rates will start going up higher as you get interest rates going higher it will further hurt the consumer trying to buy account -- a house and will also make the dollar stronger which will make our experts look at -- less attractive to the market. There's a couple of ripple effect and to some of these -- that is really the theme of the next six months for the new administration. There are several unknowns that we are looking for right now. This may have nothing to do with these plans as well. Thank you so much for giving us your insights. That is Jeff Probst financial lecture at SDSU.

America's central bank is nudging its benchmark interest rate higher, announcing a move from the current 0.25-0.50 percent to a range of 0.50 and 0.75 percent. The decision emerged from a session of the Federal Open Market Committee Wednesday.

Analysts had widely expected the hike of a quarter of a percentage point. With a low unemployment rate and signs of growth among workers' wages, Fed Chair Janet Yellen said the central bank expects to raise rates three more times in 2017. The official Fed announcement predicts "only gradual increases" in the rate.

Advertisement

The vote to nudge benchmark interest rates higher was unanimous, the central bank says. The federal funds rate has fallen sharply since reaching its recent high in June of 2006, when the rate stood at 5.25 percent.

The interest rate decision was announced at 2 p.m. ET; Yellen held a news conference 30 minutes later. We've updated this post with details from that event.

"The stock market was expecting the Fed to raise rates, so this increase in rates was already priced into market prices," former Fed economist Ann Owen, a professor at Hamilton College, tells NPR's Jeremy Hobson on Here and Now. "The only time there's a reaction in the stock market is when there's some element of surprise."

Discussing banking officials' economic projections Wednesday, Yellen said the GDP is expected to grow by a rate of 2.1 percent in 2017 (from a current mark of 1.9 percent) and by 2 percent in 2018.

Announcing its decision, the Fed noted that inflation has increased "but is still below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports."

Advertisement

The rate hike is the first of the year — despite signals from the Fed when it raised rates at the end of 2015 that more boosts were likely in 2016. While economists were encouraged to see U.S. workers' wages finally rising this year, international developments (China's slowdown, Brexit) complicated the picture.

The interest-rate decision follows a two-day meeting of the Federal Open Market Committee. For analysis of the economic picture officials are seeing — and how it might change — here's David Wessel, director of the Hutchins Center at the Brookings Institution, who spoke about the Fed's expected move to NPR's Steve Inskeep for today's Morning Edition:

"They're afraid that we're now at the point where the economy is so close to full employment that they'll get more inflation than they want, so they're gradually taking their foot off the monetary accelerator. Interest rates are still pretty low, but they're starting to go up: Mortgage rates, for instance, were 3.5 percent on a 30-year mortgage earlier this year; [they] are now well above 4 percent. So, interest rates on savings and borrowing are going to go up a little bit over the next year."

In addition to the country's economy, Yellen and her colleagues are also expected to take into account the ongoing political transition in Washington, where President-elect Donald Trump is preparing to take power and Republicans will continue to lead Congress.

Here's how Wessel, who's a contributing correspondent to The Wall Street Journal, sees the political context:

"The picture has changed a lot since the election. Most people in Washington and the markets expect a tax cut, an increase in spending on defense for sure, maybe on infrastructure. And so in the short-run that'll give the economy a little more oomph, and that's leading people to think the Fed may raise increase rates a little faster than had been anticipated before the election."

Raising interest rates is also attractive to federal banking officials who want to accomplish a number of goals — from reloading its most powerful weapon to stimulate the economy to preventing potential bubbles from forming in either the investment or housing sectors.

As NPR's Marilyn Geewax reported ahead of last year's rate hike, "if rates already are as low as possible, then the Fed doesn't have that weapon available to fight off a recession."

Copyright 2016 NPR. To see more, visit http://www.npr.org/.