U.S. Chamber Chief Economist Answers Key Questions On Fed Rate Hike

WASHINGTON, D.C. – The U. S. Chamber of Commerce Chief Economist Dr. Martin Regalia today answered key questions about the Federal Reserve's decision to increase interest rates. Dr. Regalia is a former Fed economist, who has also worked for the Congressional Budget Office and the banking industry.

Why did the Federal Reserve raise interest rates?

While we believed the benign inflation figures released last week gave the Fed some leeway to hold off on further rate increases, the modest move taken today to raise rates by 25 basis points is unlikely to halt the current rate of growth.

The Fed increase was designed to soak up some of the excess liquidity that they pumped into the markets in the wake of last year's hedge fund problems. With the economy running as strongly as it has been, the Fed has worried about tight labor markets triggering inflation.

Why a quarter point?

The Fed move was intended to slow the economy to a more sustainable rate of growth and head off any incipient inflation. They stuck to a relatively modest increase to avoid overcorrecting. With inflation remaining in check, any greater move would likely have subjected the Fed to criticism of heavy-handedness.

What does increasing interest rates mean to the economy?

A move of this magnitude will have a relatively small impact on economic growth. The biggest impact is probably psychological. While a quarter point increase can price marginal homebuyers out of the market, and make buying on credit slightly more expensive, it is not likely to bring the spending juggernaut to a halt.

How does an increase in interest rates effect businesses?

Businesses, especially small businesses, will find their borrowing costs up slightly but credit should still be relatively easy to get. Customers will be somewhat less exuberant than before, but with job prospects solid and confidence high, they will still be coming in to buy.

Do you foresee other raises this year? What about next year?

I would anticipate one more twenty-five basis point move this year before the Fed takes a break to admire and evaluate its handiwork. I believe that they would rather move this year and lessen the prospects of having to tighten credit aggressively during next year's election season.

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