The Federal Reserve voted Wednesday to raise short-term interest rates for the third time this year. That means the federal funds rate, which helps determine rates for other borrowing, will now hover in a range of 1.25% to 1.5%. Overall, still in historically low territory.
This is the fifth time the Fed has lifted rates since the 2008 financial crisis. And it has signaled it will stay on course next year, with three rate hikes planned in 2018 and two in 2019. Expect a slow climb towards more normal levels of around 3%.
Implications for the Economy… and Restructuring Professionals
Widely hailed as a show of continued optimism about the U.S. economy, interest rate hikes are uniquely celebrated among one group of people. Bankruptcy and restructuring professionals! Why? Because, although the rate hikes have thus far not caused noticeable pain in the economy, rate hikes tend to moderate economic growth.
That leads me to wonder, how strong is our economy and what impact are the continuing rate hikes likely to have? The Fed cast its decision as a positive sign of worldwide economic momentum as employers keep hiring, consumers keep spending, and inflation remains (oddly) low. And it noted that the imminent tax bill is a key driver of its own rosy forecast. Although the Fed stopped well short of forecasting the 4% growth Republicans have promised, it expects a more modest, albeit uncertain, 2.5% increase in growth from the tax plan.
“At the moment,” Fed Chair Janet L. Yellen said, “There’s less to lose sleep about now than has been true for quite some time.”
Coming Next: Ask an Economist!
“I think economics is a terrific field,” Yellen said. Well, so do I! So when Yellen stated that the Fed’s growth expectations “are in line with the general expectation among most economists that the type of tax changes that are likely to be enacted would tend to provide some modest lift to GDP growth in the coming years,” I decided to run this by the smartest economist I know. Stay tuned for an upcoming blog post on interest rates, the tax bill, and you….
Janet Yellen: Another Crack in the Glass Ceiling
I end this post with a fond farewell to Janet Yellen, our outgoing chairperson of the Federal Reserve — the first woman to hold the top spot in the 100-year history of the U.S. central bank, or any major central bank. Asked for any thoughts for women and minorities who see her as a role model, Yellen said she would love to bring in more women and minorities at the central bank and lamented that their numbers in the field of economics is disproportionately and disturbingly low.
In response to her call to action, I volunteer to mentor any young woman (or anyone else!) interested in pursuing an economics degree. Little known fact: I hold a B.A. in Economics from Trinity University. A degree with many uses, at the Fed and beyond.
If there is a job that you feel passionate about, do what you can to pursue that job; if there is a purpose about which you are passionate, dedicate yourself to that purpose.