The Fed likes to act in December…and this December will be no different. When the central bankers convene their two-day policy meeting this week, they are widely expected to increase short-term interest rates by a quarter of a percent to a new range of 1.25 to 1.5 percent. It would be the third increase of the year, the fourth in the past year and the fifth of the rate increase cycle.
That said, even with another bump up, interest rates would still be at historically low levels. Ten years ago (December 11, 2007) on the eve of the Great Recession, the Fed had begun to decrease rates to 4.25 percent (they had been as high as 5.25 percent in June 2006). It then took the central bank a year (until December 16, 2008) to move the fed funds rate from 4.25 percent to the emergency range of zero to 1.25 percent, a level that held constant for seven years.
In the transcript from that December 2008 meeting, Fed officials understood that the institution had become more important than ever. Then-Chairman Bernanke framed the crisis that the country faced: “As you know, we are at a historic juncture—both for the U.S. economy and for the Federal Reserve. The financial and economic crisis is severe despite extraordinary efforts not only by the Federal Reserve but also by other policymakers here and around the world.”
Nine years later, the Fed is attempting to manage another transition, from Chair Janet Yellen to Jerome Powell. In what will be her last press conference, Yellen will describe how the Fed will continue to raise rates and unwind the bonds that it owns against a backdrop of low core inflation.
The November jobs report was just another data point to support the Fed’s rationale for a rate increase: the economy added 228,000 gain non-farm payrolls and the unemployment rate remained at a 17 year low of 4.1 percent. Despite the strength of the result, wage growth remains muted. Average hourly earnings grew by just 2.5 percent from a year ago.