Today, the Federal Reserve raised interest rates for the first time in more than half a decade. I cheered a little bit when the announcement came to pass, I admit. For the last two to three years, the question of when the Fed will raise rates has been an ongoing topic of discussion in my line of work.
The New York Times has put together a very clever explainer of the impact of the Fed raising rates via the Rube Goldberg Machine.
The short-term interest rates vs. long-term interest rates is something worth considering:
When the Fed raised rates in the mid-2000s, long-term rates didn’t go up. This puzzled a lot of economists, including the Fed chairman at the time, Alan Greenspan. The culprit, according to a theory put forward by his successor, Ben Bernanke, may have been savers in countries like China. They were sitting on piles of cash and had few reliable places to park it, so they chose the safest vehicle they could find: United States government debt. Whether that analysis is correct or not, the key idea is that while the Fed has a great deal of control over interest rates in the short run, it has a good deal less in the long run.
I also liked this explainer on the notion of the increase in rates being “priced in”:
The Fed must change beliefs in a way that doesn’t surprise anyone, or it risks putting the economy in shock. This is why, for the last few weeks, the Fed has been loudly (by central bank standards, at least) telling markets and consumers that it’s going to raise rates in December. It wants people to be able to prepare for that announcement and for markets to price in their reaction ahead of time. So there’s a strong possibility that the Fed’s decision on Wednesday to raise rates will not cause much of anything to happen. And if indeed this is the case, the Fed will have actually succeeded in running its machine.
As the article correctly points out, rate increases make life a little bit harder for borrowers and a little bit easier for savers. Are you cheering this move?