What To Expect From The Fed
STEVE INSKEEP, HOST:
If the analysts have it right, the Federal Reserve is raising interest rates today again. They've gone up a couple of times already this year, several times in recent years as the Fed works to manage inflation. And yet interest rates are still, by historic levels, pretty low. So what's going on here? David Wessel is director of the Hutchins Center at the Brookings Institution. Good morning, David.
DAVID WESSEL: Good morning, Steve.
INSKEEP: So what's driving the interest rate hike?
WESSEL: Well, basically, the economy is doing very well. The Fed officials have kept interest rates extraordinarily low. They've put their foot on the gas pedal for a quite a while now. With inflation now creeping up to their 2 percent target, unemployment at an 18-year low of 3.9 percent and headed down, they don't think the economy any longer needs this extraordinarily low interest rates. So they're pulling their foot off the gas pedal. They're not yet touching the brake, but some Fed officials are saying it's time to touch the brake.
INSKEEP: Well, a couple of things here. One, we discussed how inflation has gotten to the point - still pretty low, but - gotten to the point where it's eating the average person's wages, right? Wage hikes.
WESSEL: Right. So wages, on average, are only now slightly above inflation. A lot of workers seem to be getting bonuses rather than wages. But that's not beginning to compensate for all the years at which wages have risen much more slowly for the average person than inflation. In fact, the Census Bureau recently said that the typical man who worked full-time last year earned less adjusted for inflation than his counterpart did in 1999...
WESSEL: ...Using the official inflation measure.
INSKEEP: And yet we're at this point where they need to squeeze the economy a little bit. Do President Trump's tariffs, which are beginning to hit soon, factor into this? Because these are tariffs on just about everything, ultimately, that the United States buys from China. Does that raise prices enough that the Fed has to consider that part of inflation?
WESSEL: Well, the Fed doesn't have to worry much about President Trump's tariffs in the short-run. After all, they haven't had that much effect on the overall economy, just on some pockets. The United States still produces most of what it consumes and consumes most of what it produces. But over time, the Fed does have to worry, will the tariffs slow the economy so they stop raising interest rates so much, or will they add to inflation, as you suggest, and force them to raise interest rates more rapidly than they've planned?
INSKEEP: One other thing I'd like to ask about, David Wessel. Interest rates went down around the time of the financial crisis. They were down around zero, effectively, for a very long time. And by now, we have a whole generation of consumers that effectively has no experience with high-interest rates, no experience with high inflation. What's it mean now that we're heading into a new phase?
WESSEL: Well, I don't think they have to worry about high inflation. We're nowhere near that. But you're absolutely right on the interest rates. This is a group of people, people in their 20s and 30s, who seem to have a lot of debt. And for a lot of them, whether it's a car loan or an adjustable rate mortgage or, in some cases, student loans, the interest rate on their loans has been relatively low. It's going to start going up. That's going to pinch. On the other hand, some people who have savings may enjoy the fact that the bank's finally going to start paying them more than nothing on their savings.
INSKEEP: (Laughter) Which has been the experience for a lot of people. But you're saying that the really low car loan or the really low house loan, that's going to get a little harder?
WESSEL: Absolutely. And as I said, these people have lots of debt and they don't have a lot of assets. They're much less likely to own a home than their counterparts were a generation ago.
INSKEEP: David, thanks very much.
WESSEL: You're welcome.
INSKEEP: That's David Wessel of the Brookings Institution. Transcript provided by NPR, Copyright NPR.