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Raising interest rates like it’s 1994

Dan Gorenstein Dec 16, 2015
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The Federal Reserve is expected to make a long-awaited move on interest rates Wednesday, increasing them for the first time since 2006.

The Fed said it expects its benchmark rate to rise gradually from the current near-zero level to 4 percent by 2018, so long as developments in the economy allow it.

A recent time rates hit 4 percent was after the recession in the early 1990s, and it was a time of rapid rate increases.

“In January of 1994, the interest rate was about 3 percent. By January of 1995, it was 5.5 percent,” said University of Chicago economist Anil Kashyap.

Kashyap said to really feel the impact of an interest rate, you’ve got to know the rate of inflation, too.

“We usually think your wages move more or less in line with what inflation is. We want to figure out how much you really have to come up with to cover the interest costs,” he said.

In ’94, Kashyap said, wages and inflation were working in tandem enough so a lot of us could come up with the money for a car payment or your mortgage – if you had a job. 

While most of us remember the mid-90’s as a time of economic prosperity, the unemployment rate was 6.1 percent in January, 1994.

“Yeah, it’s easier to find a job today,” said AEI Economist Michael Strain.

But he added a big caveat: “With hindsight, we know that the economy in the 90’s was really ripping. Right now we know the economy is not really ripping.” 

Given that context, Strain says 1994 was probably a better time to get a job than 2015.

And that is a lesson as we try to compare this moment when interest rates inch up to any other period. Economic conditions — and how we experience them — ultimately depend a lot on our immediate past and the future.

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