Why the Fed raising interest rates wasn’t all that surprising
Even if last Friday’s employment report had been a dud, the Federal Reserve was likely to raise interest rates again this week.
But the report wasn’t bad.
In fact, the 228,000 new jobs created in November exceeded the 190,000 that were expected. And November’s gains continued a streak of improvement in the job market that has lasted for a few months.
The one exception was September, when only 38,000 new jobs were created. And that disappointment resulted mainly from the rash of hurricanes that hit the country.
So, the Federal Reserve, which is meeting Tuesday and Wednesday, is probably going to boost borrowing costs as one of Janet Yellen’s last official acts as chair of the Fed.
This will be the third hike this year and the fifth since December 2015. This is a gentle pace of increase. Lower-than-expected inflation has befuddled the Fed and caused it to increase rates more slowly than would be expected after a decade of ultralow borrowing costs.
There’s a lot to be talked about here. Let’s start first with how these hikes will affect the federal government.
As you’ve probably heard, Congress looks as if it is going to change the tax laws. That move is expected to raise the federal debt by an additional $1 trillion to $1.5 trillion over the next 10 years.
That’s the increase in the debt just from tax reform and doesn’t take into account how much the debt is going to rise anyway. Now you have to add something else to the debt debate: How much more will Washington (and state and local governments) have to pay just because of higher rates?
A lot of the Treasury Department’s $20 trillion in debt, of course, will be locked in at the low rates for years. But any future borrowing, or loans that need to be extended, will be subject to the higher rates.
The Fed is going to change some other things by raising rates.
One is that fixed-rate investments like government and municipal bonds are going to become more attractive. While that’s not likely to cause many investors right now to pull money out of the high-flying stock market, there will come a day when the safety of a fixed yield will come back in style.
And increasing borrowing costs will also cause companies and individuals to go into debt less, which means they will buy less. So by increasing rates, the Fed is working counter to what the Trump administration and Congress are trying to do — that is, get the economy growing faster than the barely 3 percent growth it’s now attaining.
I’ve been telling you for years that the problem isn’t just that the US economy wasn’t growing fast enough. The real problem is that the economy is broken.
And now you are seeing in real life what I mean. While Congress is taking drastic and dangerous measures on taxes to increase growth, the Fed has to take measures that are counterproductive to that goal by raising interest rates and reducing the size of its portfolio, which is swollen from quantitative easing.
Nobody is wrong here. The Trump administration and Congress are doing what they need to do, although I think there is a better way, which I’ll explain on Thursday. And the Fed is doing what it has to do to keep inflation and speculation — which is rampant in things like bitcoin, high-end real estate, the stock market and even art — in check.
Last Friday’s job report is an example of how confusing the economy is.
While the reported growth in November was a healthy 228,000 jobs, the figure was much larger when you look at the raw data. The number of new jobs created by companies rises to 532,000 when you look at the figures on a non-seasonally adjusted basis.
And 2.1 million jobs — again, without taking seasonal adjustments into account — have been created since Donald Trump took office.
What’s confusing is that inflation has not been increasing by a lot — at least not according to Washington’s numbers. If the economy really were growing this rapidly, the price of goods and services should be heating up.
Jerome Powell, who takes over for Yellen next year, is expected to continue increasing rates as long as the economic numbers stay cooperative. But the Fed took extraordinary measures when it pumped massive amounts of money into the economy through QE, and now it’s trying to figure out what kind of Frankenstein monster it created.