The Cable

Two U.S. Fed Officials Hint It’s Going to Get More Expensive to Borrow Cash

Two U.S. Fed officials hint a December interest rate liftoff is coming.

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Since last March, investors have expected Federal Reserve chief Janet Yellen and her colleagues on the Federal Open Market Committee to raise interest rates. Based on comments made Wednesday, they might finally get their wish.

In separate appearances, Yellen and Federal Reserve Bank of Atlanta President Dennis Lockhart gave strong indications the Fed will raise interest rates from current levels of close to zero. The cost of borrowing from the U.S. central bank has not gone up since 2006, and has been near zero since 2008, in an effort to stimulate economic activity to help the United States recover from the Great Recession.

The Fed will decide on rates during its next meeting, set for Dec. 15-16. But based on Wednesday’s comments, it appears liftoff from zero is almost here — assuming there is no serious financial disruption in the next two weeks.

“Absent information that drastically changes the economic picture and outlook, I feel the case for liftoff is compelling,” Lockhart said Wednesday morning in Florida.

Hours later, speaking in Washington, Yellen gave no indication the long-expected rate hike would be put off until 2016. In fact, she said additional delay could “inadvertently push the economy into recession.”

“Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability,” Yellen said.

Increases to the cost of borrowing won’t come as a shock to Wall Street. The CME Group FedWatch tool, a futures market that bets on Fed policy, shows there’s a 75 percent chance the rate hike comes later this month.

But what happens after the increase is already worrying some investors and politicians. If the Fed raises rates, it’s a sign of confidence in the U.S. economy; indeed, Yellen expressed her belief in its strength Wednesday. But this brashness has risks.

Higher rates, for example, make loans more expensive for consumers who want to buy homes, cars, or other big-ticket items. That in turn could fuel purchasing reluctance. It also could make businesses more wary of borrowing money to grow companies or hire new workers.

There are also political considerations. The impacts of the rate hike really wouldn’t be felt until the spring. Combine that with ongoing concerns about China’s dwindling economic output, tepid growth in Europe, and slowdowns in emerging markets, and the potential for an economic spillover in the United States will also rise. That could be bad news for Democratic presidential frontrunner Hillary Clinton, because it would give Republicans ammunition to attack her on financial grounds.

“God’s plan is that things rise in the spring, and so if you want to be good with the Almighty, you might want to delay until May,” Rep. Brad Sherman (D-Calif.) said last month about the looming rate hike.

The world will know more Thursday, when Yellen heads to Capitol Hill to testify to Congress’s Joint Economic Committee. But if Wednesday’s hints are accurate, the cat is already out of the bag: Get ready to pay more to borrow.  

“If she doesn’t hike, there’s going to be real questions about the Fed’s credibility,” Mark Haefele, global chief investment officer of UBS Wealth Management, said Wednesday on CNBC.

Photo credit: Win McNamee/Getty Images

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