Rate hike by Fed not likely to rattle the U.S. economy

In fact, some say, increase might ‘lift spirits’ of savers, lenders and cause economy to grow

- Paul Davidson USA TODAY

A Federal Reserve interest rate hike Thursday could shake markets but is likely to cause just a ripple in the solidly growing economy, analysts say.

And some economists say rates are so low that small bump might spur growth. The Fed’s benchmark rate has been near zero since the 2008 financial crisis. Many experts say it’s a toss-up whether the Fed will act Thursday after a two-day meeting.

A quarter of a percentage point boost in the fed funds rate likely would marginally push up borrowing costs for consumers and businesses, including mortgages, car loans and corporate bonds, tempering such borrowing and economic activity. Such long-term loans, however, probably would rise only a tenth of a percentage point or so, says Mark Zandi, chief economist of Moody’s Analytics.

Assuming the Fed follows through on its vow to lift rates gradually, by about a percentage point over the next 12 months, that would likely shave about 0.15 percentage points off economic growth the subsequent year, Zandi estimates. For example, an economy that grew at a solid average of 2.75% at an annual rate the past four quarters instead would expand by 2.6%, assuming that pace continued.

Similarly, monthly job growth, which has averaged a healthy 212,000 so far this year, would be trimmed by about 30,000 and the unemployme­nt rate would be nearly a tenth of a percentage point higher than it would be otherwise.

“It would have a meaningful but modest effect on growth,” Zandi says. A similar impact would occur annually for three years as the Fed nudges its key rate back to a normal level of about 3.75%. The goal, however, is to head off a bout of inflation that ultimately could do far more damage to the economy than gently rising interest rates.

A sharper rate hike cycle the Fed began during the housing bubble in 2004 contribute­d to progressiv­ely slower economic growth in the following years.

Yet moving this month may carry larger risks. Diane Swonk, chief economist of Mesirow Financial, says it could have a bigger negative effect on growth if it spooks markets now betting the Fed will hold off. That could spark another stock plunge that saps Americans’ confidence and spending, cutting quarterly growth by up to 0.2 percentage points at an annual rate by the end of 2015, she says.

Some economists say a rate increase might goose the economy. Economist Joseph LaVorgna of Deutsche Bank says interest rates are so low that raising them modestly would have a negligible effect on 30year mortgages and other rates.

Meanwhile, he says, the move would increase the interest income of retirees and other bank depositors, prod banks to lend more by widening their profit margins and proclaim the economy healthy enough to shift from crisis-era interest rates.

“It will lift ‘animal spirits,’ ” LaVorgna says.

BLOOMBERG ?? Fed Chair Janet Yellen will consider the rate increase at this week’s twoday meeting.
DREW ANGERER, BLOOMBERG Fed Chair Janet Yellen will consider the rate increase at this week’s twoday meeting.

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