What Fed does makes a difference

Higher interest rates do slow economyIn looking at government data over the last 60-plus years, it is clear that increases in the federal funds rate by the Federal Reserve have slowed the U.S. economy, as measured by change in real GDP. Will last week's increase in the rate to 0.25 percent start to slow the nation's recovery from the Great Recession? / SOURCES: Federal Reserve and U.S. Bureau of Economic Analysis
Higher interest rates do slow economyIn looking at government data over the last 60-plus years, it is clear that increases in the federal funds rate by the Federal Reserve have slowed the U.S. economy, as measured by change in real GDP. Will last week's increase in the rate to 0.25 percent start to slow the nation's recovery from the Great Recession? / SOURCES: Federal Reserve and U.S. Bureau of Economic Analysis

When the Federal Reserve’s Open Market Committee raised the federal funds rate by 0.25 percent last week, it broke an unprecedented streak of near-zero rates that was put in place to ward off the powerful effects of the Great Recession.

At the same time, the Fed said that it expects that future increases in the federal funds rate will be gradual and put in effect only if future data warrants increases.

The issue now is will the rate increase, which the Federal Reserve has said will be the first of many, have a negative effect on the still-recovering U.S. economy?

Past experience shows that increases in the benchmark interest rate are nearly always followed by downturns in the economy. But those increases were often much larger than what the Fed says it will undertake. The markets, at least on Dec. 16 following the news of the increase, seemed happy with the rate change. But that is a fickle gauge to use.

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Rather, it will only be once future gross domestic product numbers come in that we will know if what the Fed did is the right prescription for what ails the U.S. economy. •

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