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Credit Insights

After Seven Years, the Fed Is Finally Primed to Lift Rates

Chair Janet Yellen makes the case.

It has been an unprecedented seven years since the Federal Reserve lowered the federal funds rate to near zero. Since the recession ended 25 quarters ago, there have only been two quarters of negative real GDP growth (fourth quarter of 2010 and first quarter of 2014). Over the same time, unemployment has dropped from 10% to 5%. Thus far this year, GDP has risen at an average rate of approximately 2.25% and the monthly increase in payrolls has expanded at an average pace of over 200,000 per month. Wage growth has also finally started to pick up, rising 2.6% this year through November. Given recent commentary from Federal Reserve officials, we expect the Fed will make its first step toward normalizing monetary policy by raising the federal funds rate by a quarter percentage point at its Federal Open Market Committee meeting this month.

At her testimony to the Joint Economic Committee last week, Fed Chair Janet Yellen laid out what essentially was the argument to begin raising interest rates. She highlighted that economic growth and employment have recovered since the Great Recession, and in her outlook, the economy has expanded at a pace "that will be sufficient to generate additional increases in employment and a rise in inflation to our [the Fed's] 2% objective." In addition, she said, "The risks to the outlook for economic activity and the labor market as very close to balanced." Although inflation continues to run below the Fed's targeted 2% rate, she anticipates that "the drag due to the large declines in prices for crude oil and imports over the past year and a half will diminish next year. With less downward pressure on inflation from these factors and some upward pressure from a further tightening in U.S. labor and product markets, I expect inflation to move up to the FOMC's 2% objective over the next few years."