The Fed’s rate hike is more baby step than leap

Tracey Samuelson Dec 17, 2015
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The Fed’s rate hike is more baby step than leap

Tracey Samuelson Dec 17, 2015
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To the surprise of very few observers of the Federal Reserve, the central bank raised the target for its federal funds rate a quarter of one percent on Wednesday, in line with what it had been telegraphing.

Even with this increase, rates are still very low.

“I think the big message is: the economy is good enough that they can tighten policy,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute. “They’re going to do it really slowly and they’re going to wait to see how the economy changes over time. Nothing’s prescribed.”

The Fed will keep an eye on how the economy is doing before any future rate increases.

“As the committee has said, we’re watching economic developments closely and we will adjust policy in whatever way is necessary to support the attainment of our objectives,” Fed Chair Janet Yellen said after the announcement.

Still, even though this first increase is small, raising from near zero levels has a psychological impact.

“Nothing is very salient, but it’s not going to be nothing anymore,” said Robert Shiller, an economist at Yale University. “It’s going to start to look like real money.”

People who took on risky investments because they offered higher returns might consider safer options if interest rates continue to climb.

“Maybe not at the very beginning, not immediately, but assuming that interest rates are back up to over 1 percent, or something that looks reasonably normal or the beginning of normal, it may set off a new discussion and a new sense of what kinds of risks we want to take,” Schiller said.

Bottom line, this is baby steps, not big leaps.

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