Delaware Public Media

University of Delaware professor explains Fed interest rate changes

Jan 1, 2019

The President continued to criticize the Federal Reserve last week for a recent increase to the federal fund interest rate.

 


James Butkiewicz, professor of economics at the University of Delaware, explains the Fed increases the benchmark interest rate to mitigate future inflation.

“The fear is that inflation will get started again and then they’ll have to raise rates and slow the economy down to bring inflation back down and that’s painful and costly. So they're rather do this in advance hoping to keep inflation under control,” he said.

“The federal reserve interest rate decisions have their effects with a lag so that output growth is affected a year later and inflation may be affected two years later,” Butkiewicz added.

He says the change in the benchmark interest rate could be felt by consumers.

“So the higher rates will mean higher home mortgage rates, higher auto loan rates and higher rates for businesses borrowing money,” said Butkiewicz.

He notes the economy as a whole is still expanding, with strong consumer and to some extent government spending moving the economy forward.

“If they slow down we could see a recession. I’m not thinking there’s a recession in the immediate future but I too am concerned about signs of slowing down in a lot of different places.”

He says he sees slowdowns in residential construction and business investment— as well as flat auto sales.

Butkiewicz says some may not feel the current strength of the economy because wage growth has been slow the past few years.

Delaware’s minimum wage increased to $8.75 on January 1 and will go up again this fall.