These 7 Charts Can Help You See What The Fed Is Doing
Brace yourself: News outlets are about to hit you hard with coverage of the Federal Reserve's decision Wednesday on interest rates.
That's because nearly everyone believes the Fed is going to raise interest rates for the first time since June 2006. If that does indeed happen, the federal funds rate — the rate banks charge each other for overnight loans — will tick up a quarter percentage point from near zero.
That may begin a chain reaction that leads to lots of rates moving up in 2016.
But why have rates been so low for so long? And is it really time to raise them?
Here are some charts to help explain the thinking of the nation's central bankers.
First, it's important to understand just how bad the recession was from late 2007 to mid-2009. This chart shows that the gross domestic product, the broadest measure of economic activity, turns down with a vengeance in late 2007, and then rebounds only modestly after mid-2009.
When economic activity plunged, unemployment shot up — to a peak of 10 percent in October 2009. Joblessness fell back slowly, but steadily.
When employers were slashing jobs, the housing market froze up. Millions of Americans could not make their mortgage payments. In the aftermath of the housing bust, mortgage rates fell and have stayed at historically low levels.
To help the economy recover from those terrible times, the Fed started cutting interest rates in 2007, and then kept cutting. Once the federal funds rate hit bottom in 2009, the bankers held it there, year after year.
Even though the economy got stronger after 2009, growth remained slow. With the economy still having so much slack, inflation stayed down too. The Fed took that as a sign of economic fragility.
The low interest rates did help revive the stock market. Cheap loans helped companies recover and made stock investing more attractive than saving money in interest-earning bank accounts.
But superlow rates have been hard on many retirees, who prefer to put their money in insured bank certificates of deposit. Those kinds of savings vehicles have paid only very low rates of interest.
So now the Fed wants to get back to more normal conditions. Fed Chair Janet Yellen has suggested many times that when the data show the economy is strong enough to handle more expensive loans, the Fed will nudge rates up. Yellen wants borrowing costs to return to pre-recession norms so that we can finally declare an end to the Great Recession era.
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