The Federal Reserve looks almost certain to raise short-term borrowing rates on Wednesday, ending an extraordinary period of government intervention in the financial markets that started at the height of the recession.
Fed chair Janet Yellen will hold a news conference at 2.30pm EST on Wednesday after the Federal Open Market Committee (FOMC) releases its latest statement. She is widely expected to end a policy of fiscal first aid brought in by her predecessor, Ben Bernanke, when the world was in the throes of the worst recession in living memory.
Earlier this month, Yellen signaled to Congress’s joint economic committee that the US economy was now strong enough for the Fed to raise rates. The unemployment rate now stands at 5% and economic growth appeared stable, she said.
“I currently judge that US economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market,” she said. “Ongoing gains in the labor market, coupled with my judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2%.”
However, many remain uncertain that the economy is ready for the Fed to raise rates. Richard Trumka, president of the US’s largest union federation, AFL-CIO, urged the Fed to “avoid making a mistake by raising interest rates”.
“Too many working people are not feeling the economic recovery because of stagnant wages. In the months to come, the Fed should focus on the policy goal that real wages should rise with productivity. Working people deserve to lead better lives by sharing in the wealth we all create,” he said.
If Yellen announces a raise, it will be exactly seven years since the Fed cut rates to the near-zero rates, on 16 December, 2008. The policy was brought in after a mortgage-backed financial bubble exploded and triggered a global financial meltdown.
“Near-zero interest rates in place since December 16, 2008, was in essence emergency medicine the Fed put in place when the US economy was on life support,” said PNC chief economist Stuart Hoffman.
He said the Fed was now confident about the current state of recovery based on “growth in jobs, growth in wages, lower unemployment and increased consumer spending”.
Since the recession, in a program started by Bernanke, the Fed has not only kept short-term interest rates near zero but also injected trillions of dollars into the mortgage and Treasury bond markets through a process known as quantitative easing (QE).
The aim has been to encourage investment and spending and bring down the jobless rate, now at a rate that is half its 10% peak at the height of the recession. However, long-term unemployment and the jobless rates for minorities and young people remain high, as does the labor force participation rate, the percentage of the population no longer looking for work.
The labor force participation rate hit a 38-year low in September and October, with just 62.4% of American civilians older than 16 either working or looking for work. It has since improved marginally, to 62.5% in November.
US stock markets once reacted violently to any suggestion that rates might rise. But after the Fed ended QE in October, investors appear to have become resigned to the end of zero rates. On Monday, US stock markets remained largely flat ahead of the historic decision.
