March 23, 2018
As the economy grows and a low jobless rate of 4.1 percent continued for a fifth straight month, the Federal Reserve Bank under Chairman Jerome Powell took action March 21. In a statement, the U.S. central bank announced that it will “raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation (increased prices and decreased buying power of money).”
But not everyone thinks this is a good idea. Tim Mulaney at Marketwatch writes that this monetary policy, which raises the price to borrow money, will harm the economy.
How would that occur? Put simply, this rate change will lower the amount of money that consumers have in their pockets to buy goods and services from businesses. That would negatively affect the latter’s bottom line, thereby slow the current economic expansion, which has been underway since the U.S. emerged from the Great Recession in June 2009.
“Higher rates will discourage consumption and investment and in that way slow growth and job creation,” according to Dean Baker, senior economist with the Center on Economic and Policy Research in Washington, D.C. “Climbing interest rates would hike costs for car loans, credit card debt, student debt and home mortgages.”
What of business borrowing to expand or launch a new enterprise?
“Of course, an increase in interest rates will add to the cost of a business loan,” said Frank Knapp Jr., president and CEO of the South Carolina Small Business Chamber of Commerce. “However, more importantly there needs to be better access to capital for small businesses.”
Is there a positive aspect?
“The small business owners and entrepreneurs who have not been able to secure loans to start or grow their businesses would probably be very willing to pay a slightly higher interest rate if they could get loans in the first place,” Knapp said.
What about higher interest rates in the public sector? State and local governments will also face higher interest rates to borrow for infrastructure and other purposes, according to Baker of the CEPR.
The Fed is concerned that a strong labor market will increase the wage income of workers and spark inflation. The Fed seeks to “prevent inflation by keeping people out of work, thereby putting down ward pressure on wages,” Baker said.
“While the economy is adding jobs at a healthy pace, wages haven’t grown enough to make a difference to most American workers, so a series of interest rate hikes at this time seems premature,” said Chris Lu, former Deputy Secretary of Labor under the Obama administration, and now a board member of the American Sustainable Business Council.
For businesses, a drop-off in the purchasing power of consumers would hit firms’ bottom lines. Consumption is 70 percent of the U.S. gross domestic product (GDP), better known as the economy.
The Fed plans to hike rates twice more in 2018 and three times in 2019.