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Here's What The Fed Interest Rate Hike Means For Consumers


Megan Greene isn't convinced the Fed did the right thing today. She's chief economist at John Hancock asset management. Welcome back to the program, Megan.


CORNISH: So talk a little bit about why you think the Fed might have moved too early on this rate increase.

GREENE: Well, I think that the only economic indicator that really suggested the Fed should be hiking rates is the unemployment figure, which at 5 percent, is very low even by American standards. But I think the relationship between unemployment and wages and inflation, on the other hand, gets broken down.

And so we've heard that inflation is well below the Fed's preferred targets. And Yellen spoke a lot about oil prices being lower, and they just need to stabilize for that to stop putting downward pressure on inflation. But even if you strip out the price of oil and look at core PCE, which is the Fed's favorite measure of inflation, it's around 1.3 percent, which is well below the Fed's targeted 2 percent.

And I don't think we're going to have any kind of upward wage pressures really coming in, and therefore, we're not going to have a lot of upper pressure on inflation, on top of which, as the Fed hikes, then every other major central bank weakens. The U.S. ends up importing a lot of deflationary pressures, so that will keep inflation on the floor as well. So I think the Fed could have afforded to have waited, but obviously they chose not to.

CORNISH: But this was a unanimous decision, right?

GREENE: It was. I think that there is a natural bias on the part of central bankers, generally, but the Fed in particular towards normalizing monetary policy. And part of that is because at the zero lower bound, monetary policy tools that the Fed's used to using just aren't as effective as they would like them to be. So they'd like to get rates up so that their tools are more effective. On top of which it, I think, when you have such extraordinarily easy monetary policy, the Fed starts being blamed for things like inequality because quantitative using and rates at the zero lower bound really boosts asset prices, and that really benefits people who are holding on to those assets - so the upper echelon of society.

And so it's stoking inequality, and the Fed doesn't want to be under the spotlight for doing that sort of thing. And so the Fed would like to normalize monetary police to get out of the spotlight and under the influence of politicians or the media or society at large.

CORNISH: You talked about the upper echelons. What about everyone else, right? I mean, how should people be thinking about their finances as this interest rate increase kind of signals the end of easy money?

GREENE: Well, I think we can expect that rates will continue to go up from here gradually, but they're on an upward trajectory unless the Fed really messes up and raises rates too quickly and has to reverse course. And so that has the biggest implication on those who are sitting on credit card debt because credit card debt is linked to short-term rates. For those on credit card - who are holding on to credit card debt should look to pay that down because it will only get more difficult to service.

Those who have mortgages are usually more lucky because those tend to be linked to long-term rates. And as short-term rates are going up, long-term rates will go up as well but much more gradually. I think that those who are looking to take out car loans or student loans - new car loans or student loans - they'll also have - be affected by higher short-term rates.

CORNISH: And, Megan, just a short time left - most big banks increased their prime rates - the rates they charge customers, but they didn't raise what people can earn on their accounts. What gives?

GREENE: That's right. I mean, that tends to be the case that banks aren't passing through the benefits to their customers. For what it's worth, we see negative rates in Europe. And actually, banks there aren't passing on that charge to customers, either, so I think it works both ways.

CORNISH: That's Megan Greene, chief economist at John Hancock. Megan, thanks, as always.

GREENE: Thank you. Transcript provided by NPR, Copyright NPR.