MIAMI (CBSMiami/AP) — As was expected, the Feds raised interest rates and now banks will likely pass their higher costs to consumers and companies leading to high borrowing rates throughout the economy.
The bigger issue, however, concerns likely increases in 2017. Here the message was somewhat ambiguous. While indicating that three 0.25 percentage point increases were possible in 2017, compared with the previous guidance that only two rate hikes were likely next year, Janet Yellen stressed in her press conference Wednesday that any changes would be small and remain highly uncertain. She continually noted that the Federal Reserve would have to adjust its thinking in 2017 based on actual economic circumstances.
The Federal Open Market Committee press release was likewise rather ambiguous. It indicated that monetary policy “remains accommodative” and that future adjustments will depend on the “economic outlook” and “incoming data.”
The important takeaway from all this is that it is really not clear what the Fed will do next year. The reason for this is that the Fed is damned if they raise interest rates considerably in 2017 and damned if they don’t.
On the one hand, debt remains a Damocles sword hanging over the U.S. economy, and a rise in rates could cut the thread. Household debt is approaching levels reached before the 2008 financial crisis, which suggests that households may be approaching the point at which they cannot repay their loans – something that can bring down banks and the U.S. economy. And real median household income remains US$1,000 below pre-Great Recession levels and $1,500 below its all-time peak in the 1990s. U.S. households, responsible for 70 percent of all spending in our economy, face a double squeeze that cannot continue.
Worse still, many households remain underwater on their mortgages. Others are slightly above water, unable to come up with the realtor commissions and moving expenses that would let them sell their home and find a more affordable place to live. Higher interest rates will worsen this problem by reducing home affordability and prices.
On the other hand, at some point, perhaps soon, the U.S. economy will enter another recession. If the tax cuts and spending increases proposed by President-elect Trump get enacted, a ballooning budget deficit (made worse by the onset of a recession) will hinder the ability of fiscal policy to create jobs. Interest rate cuts then become our only viable policy tool.
So with rates already near zero, central banks cannot lower them very much. For this reason, they want to load up on ammunition, and push them up some. At the same, time they fear the consequences of doing this. Today’s Fed guidance was ambiguous for a good reason – they are caught on the horns of a nasty dilemma.
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