Higher rates soon? Maybe
Though job market is improving, the Fed could still be cautious
WASHINGTON — A new era of higher rates on home and car loans, steeper borrowing costs for businesses and the government — maybe even a bit more return for savers — is about to arrive.
That, at least, is the word from most economists. After another solid U.S. jobs report last week, they say the Federal Reserve seems all but sure to raise its short-term interest rate next month after keeping it pinned near zero for nearly seven years.
While it could take months, the Fed’s moves should eventually drive up interest rates for mortgages, auto loans and other consumer and business borrowing.
Here are three reasons the Fed will likely raise rates when it meets next month — and two reasons it may not.
• Steady hiring: In the past seven years, the economy has gone from hemorrhaging millions of jobs during the Great Recession to sluggish and intermittent hiring during the first several years of recovery to consistently strong gains.
• Relatively low unemployment: The steady job gains have helped reduce the jobless rate to 5.3 percent from 6.2 percent a year ago and 10 percent in 2009. That’s near the 5 percent to 5.2 percent range that the Fed says constitutes a normal job market. Most economists expect the rate to fall even further.
• Ultra-low rates hamstring the Fed: Though economic growth is still modest, Fed policymakers need to raise rates from their record lows sooner or later. Rates kept too low for too long could make it hard for the Fed to respond to any future economic slump.
All that said, some analysts cite at least two reasons the Fed might put off a rate hike:
• Job market isn’t as strong as it looks. Americans’ paychecks are still growing much more slowly than if the job market were really at full health. Average hourly pay rose just 2.1 percent in July from a year earlier — far below the 3.5 percent to 4 percent pace typical in a healthy economy.
• Inflation remains too low. Consumer prices rose just 0.1 percent in June compared with a year ago. Though consumers appreciate low inflation, the Fed wants a little inflation as a guard against deflation, which can drag wages down, make consumers slow to buy and make debts harder to pay off.