The moment arrived years later than anyone expected. But nearly a decade after the onset of the financial crisis, businesses are adding jobs, unemployment is low and inside the Federal Reserve, there is no question: The economy is ready for a series of faster interest rate hikes.
“You’re hearing one voice coming out of the Fed,” said Beata Caranci, chief economist at TD Bank Group.
While central bankers and economists agree the time has come for the Federal Reserve to raise interest rates, President Trump may see it differently. The new administration has outlined an ambitious plan to revive American manufacturing, boost exports and return the economy to 4 percent growth — rates not seen in the United States for years.
By raising interest rates, the Fed could make those plans harder to accomplish. Higher interest rates could choke off growth, push up the value of the dollar and make exports more expensive, or even destabilize the surging stock market that Trump has greeted as a sign of his administration’s success.
“It’s inevitable there will be some conflict,” said David Wessel, a senior fellow in economic studies at the Brookings Institution. “At some point the White House will decide the Fed is tightening too much. And unlike his predecessors, Donald Trump will probably let us know by Twitter he’s unhappy.”
Among central bankers, however, the only question is the pace at which rate increases should proceed. To help more Americans dig themselves out of the financial crisis, some economists argue the Fed should proceed more cautiously when raising interest rates. For consumers, the rate hikes will mean higher costs on loans for homes, cars and college educations, at a time when many Americans feel they are just regaining their footing after years of hardship.
But other economists worry the Fed needs to move more quickly to deter a threat of inflation that may be just around the corner. And since the Fed’s actions take time to work their way through the economy, there’s a risk that it could fall behind in the fight against emerging inflation. That could force the Fed to raise rates more sharply later, a move that would risk destabilizing the economy.
In testimony before Congress in February, Yellen highlighted these hazards. “As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the [Federal Open Market Committee] to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.”
Meanwhile, the index of inflation that the Fed watches closely is showing signs of accelerating, and other data offers a picture of a strong economy.
The core PCE index, which excludes more volatile food and energy, grew 1.75 percent year-on-year in January, inching closer to the Fed’s 2 percent target. The U.S. economy added 235,000 jobs in February, while the unemployment rate has fallen nearly to pre-crisis levels.
The Fed's confidence also stems from a global economy where risks appear to be receding, after stumbles in China's stock market and news of Britain's impending exit from the European Union put the world on edge last year.
In a blog post on Mar. 14, IMF managing director Christine Lagarde remarked that the global economy appeared to have reached a turning point, buoyed by expectations of government spending in the U.S., stronger than expected activity in Europe and Japan, and an improving outlook for recessions in Brazil and Russia.
After slashing rates in 2008 at the depths of the financial crisis, the Fed has held interest rates near zero for years, in an attempt to stimulate the economy. It also undertook an unprecedented policy known as quantitative easing, in which it purchased huge volumes of Treasurys, mortgage-backed securities and other assets that expanded its balance sheet from less than $900 billion before the crisis to roughly $4.5 trillion today.
In October 2014, the Fed tapered off its purchases of these assets, and today purchases just enough new assets to keep the value of its balance sheet stable. In the meeting Wednesday, investors will be watching for clues as to when the Fed might start to shrink that massive balance sheet.
For years, the Fed delayed promised interest rate increases, believing the economy was too fragile to absorb them. It ventured a single interest rate hike in December 2015 and then waited an entire year before hiking rates again in December 2016.
Now the central bank has signaled it will raise interest rates three times this year, and investors are closely watching for the possibility of a fourth rate increase.
“Right now the number one question is what is the likelihood that rates could be rising more aggressively than what people and investors currently expect,” said Mark Hamrick, senior economist analyst for Bankrate.com. “The two words that Janet Yellen seems to be voicing more often lately is 'policy uncertainty.' That is as close to directly referencing the outcome of the election … as she is going to get.”
Trump has promised a buffet of tax cuts, regulatory reductions and defense and infrastructure spending increases that economists believe could stimulate the economy and add pressure to the Fed to raise rates more quickly. U.S. stock markets have surged to record highs on expectations that his policies will give businesses more room to run.
Yet some economists remain more cautious. Trump has also proposed heavy cuts to the federal workforce, limits on immigration and barriers to trade — all measures that could weigh on economic growth.
For now, the Fed has resisted efforts to explicitly weigh in on the effect of Trump’s planned policies, arguing that it can’t plan its moves around fiscal policies that may never materialize.