After an unprecedented seven years of rock-bottom low interest rates, the Federal Reserve Bank, in a highly risky move, has decided to raise interest rates by a modest 0.25%. The Fed has kept the interest rates down to virtually 0% since the Great Recession out of concern for a continuously sluggish economy. Increased borrowing of money generally is thought to increase spending, which causes more money circulation, thus stimulating the economy. Even though the generally-accepted end of the Recession occurred in June, 2009, job creation has been very sluggish. This recovery has lacked the robust numbers of added jobs of past recoveries. Furthermore, this is the first recovery in history in which household incomes have actually dropped rather than risen.
Why is this risky?
- Workers are making less money. Jobs have been added, but they are generally considered to be non-career jobs. Not only were 211,000 jobs added to the economy in November 2015, but according to the DOL, 319,000 individuals lost career-type full-time jobs and felt forced to accept much lower-paying part-time work.
- Actual unemployment is high. The labor participation rate is at a modern all-time low. Effectively, many people have been unemployed for so long that the government now counts them as having voluntarily retired, even though they are still seeking employment. Estimates of actual unemployment are much higher than the current U3 rate of 5% used by the DOL.
- Household income is down. It did make a very modest gain in November 2015, which was likely one of the reasons the Fed finally took the action of raising interest rates. But average household income is still down about $3,000 from 7 years ago. This means households have less income to pay back loans.
- Most Americans are already highly in debt. The Fed estimates a total $14 trillion in household debt. With lower household income, some economists believe that about 90% of American households have maxed out their credit cards and lines of credit. This increase in the interest rate will increase their payments, and likely encourage more indebtedness.
- We currently have inflation with lower incomes. That we have some modest inflation is one of the Fed’s rationale for increasing interest rates. But the combination of higher prices and lower incomes is devastating to American families, and is one of the reasons most Americans believe we’re still in a Recession. Increasing interest rates will leave less available money to Americans.