Will The Fed Raise Rates, Or Keep The (Little) Economic Party Going?

Transcript

SCOTT SIMON, HOST:

The U.S. unemployment rate has fallen to 5.1 percent - a lot better than the 10 percent jobless rate back in 2009. But the economy still has weak spots. The Federal Reserve will take all of this into account in two weeks, when it decides whether to raise rates from the lowest level on record. NPR's Chris Arnold reports.

CHRIS ARNOLD, BYLINE: After the financial crisis hit, the Fed did something remarkable. It pushed its benchmark interest rate down to zero, where it'd never been before, and it stayed there for years. Now, the Fed's poised to start removing that life support for the economy by raising rates. That has some analysts nervous. After all, if you take life support off too soon, the patient might crash again. But economist Diane Swonk says that people shouldn't be too worried.

DIANE SWONK: The real message for everyone is, no matter what the Fed does, the first move is going to be small, and thereafter it's going to be a crawl - up on rates. There is no surge in rates out there, and that's because the economy's just not hot enough.

ARNOLD: Swonk is with Mesirow Financial in Chicago, and she says the Fed is very aware that the economy still isn't that great. There are several million working-age Americans without jobs. Wages are stagnant. So until things improve more...

SWONK: The Fed doesn't want to snuff out what little party we might have going.

ARNOLD: Still, leaving interest rates so low for too long could spark bubbles in the housing market or the stock market, so the Fed is trying to steer a tricky course to keep the economy sailing into a better recovery. And there's another reason to raise rates. Lisa Lynch is interim president of Brandeis University and a former Labor Department economist.

LISA LYNCH: Right now, the Fed has used pretty much all of its arsenal. And if you do have another negative shock, what do they do?

ARNOLD: In other words, with interest rates at zero, the Fed wants to get back to a place where it could drop interest rates again if it had to. Still, Lynch actually sees enough slack in the labor market and the economy that if she were at the Fed, she would wait a little longer before raising rates.

LYNCH: I don't think there's any harm done in doing that. And if you move prematurely and trigger uncertainty and concern and slow down the economy, we certainly don't want to do that at this stage.

ARNOLD: One cause for uncertainty right now is China. Its economy is slowing down. Analysts say the Fed will be trying to figure out just how big a problem that might be for the global economy. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.