The word on the street is crystal clear; interest rates are going up this week. For millennials, a lot of us don’t really know what that means. The last time interest rates went up was nearly a decade ago, in June of 2006. Back then most of us were still students and didn’t give a hoot about interest rates. For the young folks in the room, this world of rising interest rates is an entirely new idea. As the talking heads drone on about what all of this means, here’s what you need to know.
The Great Recession was a god awful, once-in-a-lifetime event that mangled the economy. Since interest rates are the Federal Reserve’s first line of defense to grow the economy, they took the unprecedented step of lowering interest rates to zero (actually between 0 and .25%). This is called the federal funds rate, which is the amount banks charge one another for borrowing money. That rate that influences all other interest rates across the entire economy. Now, that rate is going up a quarter of a percent, which will raise interest rates on things like mortgages, credit cards and other loans. Everyone is watching closely because we’ve never kept interest rates near zero for this long.
The last eight years have been a roller-coaster ride into the unknown, as we’re living in an age of highly experimental monetary policy. This much intervention by the Federal Reserve was never anticipated prior to the recession, and a zero-interest rate policy is just the tip of the iceberg. For instance, when it was thought that putting interest rates at zero wasn’t enough to stimulate growth, the Federal Reserve made unorthodox moves that many say pulled the economy out of a horrible downward spiral. These measures included a poorly-understood monetary tool called quantitative easing, which created cash out of thin air. All of the quantitative easing programs were discontinued in 2014, and since then the Federal Reserve has been looking to get back to normal as soon as possible. This initial hike in interest rates is a strong signal that the Federal Reserve is taking the economy off of life support and ready to put the worst behind us.
It should come as no surprise that the politics surrounding interest rates are a doozy. It’s nearly impossible to have a reasonable conversation about the Federal Reserve and interest rates without getting extreme responses. Many conservatives, especially libertarians, would like to tar-and-feather the Federal Reserve through an “audit.” They say that the Federal Reserve, a private-public institution, shouldn’t be dictating US monetary policy and that low interest rates are causing inflation. While official inflation indicators remain tame, some claim there are signs of overheating, and they’re pointing to steadily-rising real estate prices and a frothy stock market.
On the polar opposite side of the political spectrum, liberals love the idea of ultra-low interest rates, and claim that they are important to growing the middle class and the broader economy. Many liberals favor putting off a rate hike, because they fear it will slow down the economy and hurt the shaky recovery that we’ve had since the Great Recession ended almost seven years ago.
This bitter divide over monetary policy has a bird analogy that is mentioned pretty often in the press. People worried about inflation and who want to raise interest rates are called “hawks” and people who want to keep interest rates low are called “doves”. Much of the debate over interest rates has centered on the ongoing saga between “hawks” and “doves.” Needless to say, these proverbial birds and the overall debate over the effectiveness of stimulative monetary policy does not make for polite dinner table conversation.
Looking beyond the controversy, interest rate hikes matter. How fast they rise is going to dominate the political and business landscape for quite some time to come. Some experts say there are several more rate hikes anticipated in the coming months, and that’s going to make borrowing more expensive. Others say a sagging global economy means the Federal Reserve will have to bring interest rates right back down to zero, and even possibly move to setting a negative interest rate (which is already happening in Europe). In sum, no one really knows what the hell is going to happen.
It should come as no surprise that you’ll see the ‘hawks”and “doves” continue to argue about what’s best for America. The reality is that monetary policy is extremely complex, and it’s going to take years to figure out if the Federal Reserve made all of the right moves. Whether they did too much or too little will be the subject of debate for decades to come.
Photo by dayblakelydonaldson
David is the Editor of Bold. He's especially passionate about millennial economic empowerment. A former local news reporter, David is originally from the Little Havana area in Miami, and later became a pioneer resident of the Disney-inspired town of Celebration, Florida. David holds a Master’s in Public Policy from the Harvard Kennedy School.