Julie Jason: Interest rate hike good news for economy
When the Federal Open Market Committee met March 15, it acted to raise the target range for the federal funds rate to 3/4 to 1 percent. This is the third increase since 2008. The last increase was Dec. 14, when the Fed raised the target range to 1/2 to 3/4 of 1 percent. The previous increase occurred at the end of 2015, when the target range was raised to 1/4 to 1/2 of 1 percent.
The important question is, What does this mean to everyday people?
At the press conference that followed the FOMC release, Janet Yellen, chair of the Federal Reserve System, summed things up this way when asked about what message she wanted to send to consumers: “(T)he simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks. It’s performed well over the last several years.”
That’s good news.
Yellen continued: “We’ve created, since the trough in employment after the financial crisis, around 16 million jobs. The unemployment rate has moved way down. And many more people feel optimistic about their prospects in the labor market. There’s job security. We’re seeing more people who are feeling free to quit their jobs, getting outside offers, looking for other opportunities. So, I think the job market, which is an important focus for us, is certainly improving.”
And she made an important distinction, recognizing that every individual in the United States is not necessarily participating.
She said: “We know there are problems ... particularly people with less skill and education, and certain sectors of the economy, but many Americans are enjoying a stronger labor market and feel better, feel very much better about that. And inflation is moving, moving up, I think, toward our 2 percent objective. And we’re operating ... in an environment where the U.S. economy is performing well, and we seem pretty balanced. So, I think people can feel good about the economic outlook.”
Employment: Last December, Yellen pointed out that more than 15 million jobs have been added to the U.S. economy since “the depths of the Great Recession.” We’ve added an additional million since then.
The unemployment rate is still about 4.7 percent, which is the lowest level since 2007, prior to the recession.
Inflation: As was the case last December, the Fed expects overall inflation to rise to 2 percent over the next few years, which is the Fed’s inflation objective.
The future: Last December, Yellen expected “only gradual increases in the federal funds rate over time to achieve and maintain our objectives.” On Wednesday, Yellen reiterated that the FOMC projects the federal funds rate to rise to 1.4 percent at the end of 2017, 2.1 percent at the end of 2018, and increased the 2019 projected rate only slightly from 2.9 percent to 3.0 percent.
Here is the bottom line: “We haven’t changed our view on the outlook,” said Yellen. “We think we’re on the same path ... we haven’t boosted the outlook, projected faster growth. We expect policy to remain accommodative now for some time. So we’re talking about a gradual path of removing policy accommodation as the economy makes progress, moving toward neutral.”
One more point: The Fed publishes an interesting index, the Financial Stress Index, that looks at various financial data points drawn from stock and bond markets. While the index was constructed in 1993, well before the financial crisis, it helps “monitor financial market developments.”
The index peaked during the financial crisis, but has been negative since 2009. Most recently, at minus 1.36, the stress index is the lowest since May 2015. When the index goes below zero, that means “below average financial market stress.”
Julie Jason, author of “The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad,” and “Managing Retirement Wealth: An Expert Guide to Personal Portfolio Management in Good Times and Bad,” is principal of Jackson, Grant Investment Advisers of Stamford. Email her with questions at firstname.lastname@example.org or write to her c/o The Advocate, 9A Riverbend Drive South, Box 4910, Stamford CT 06907. Copyright 2017 Julie Jason.