WWL>Topics>>12-16 7:15am Tommy, what do higher interest rates mean for you?

12-16 7:15am Tommy, what do higher interest rates mean for you?

Dec 16, 2016|

Tommy talks to Richard Grossman, Professor of Economics at Wesleyan College and author of "WRONG: Nine Economic Policy Disasters and What We Can Learn from Them," about the Fed raising interest rates.

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Automatically Generated Transcript (may not be 100% accurate)

Before the election. Some prominent stock pickers warned that the Dow would plunge of Donald Trump was elected. In reality use the opposite happened. It's up about 12100 points I think gives you gonna talk about round numbers since Donald Trump was. Elected in here to help us talk about all of this understand what's going on Richard Grossman a professor of economics at Wesly and university. And the author of wrong nine economic policy disasters. And what we can learn from them good morning professor. Thanks taking the time when this mumbling to what is going on here width the market being up with Donald Trump I guess after his presidency and no there's anything else to which you. Can attribute that. And the end of bedside mares and interest rates at seder are we moving into a new phase of of the economy in America. Well I mean they're two part here question the first part as wide as the market gone up about two after the election of Donald Trump and I guess they're there to sort of possible. Eight inches and one is that it's always easy to predict what the market's gonna do after the dot net. The second thing that I think realistically. He was elected Bob wanted to. You know one of the things that he said that he was gonna do during the election was that he would go to. Cut taxes cut capital gains taxes via a rather corporate taxes. See and do a lot of infrastructure spending and all of those things would stimulate the economy the that congress has not passed much in the way of stimulative. Fiscal policy. And so I think the market was thinking well something that I mean who's gonna increase spending cut taxes. And that could stimulate the economy that's going to be good for the stock market. So I think that the answer to the question. Of why the market is up. What will happen what the reality will be where and now these plan is that that the candidate trumps. Suggested runs into that congress. That might not be that willing to spend the kind of money that he's been talking about. On infrastructure spending I think that I think that's going to be an issue that the tax cuts I think will be much. Easier to get through the incoming congress so I think that that explains. What's going on in the market. In terms of pots going and in a new direction of the economy. Changing. I think it's too early to really. We that we don't know enough about what actually gonna happen. Tom let's go back for a second because I think a lot of times people general terms about they'll be at the water cruel or else they manage Dow set a new record adds up 12100 points. And then if you ask either of them and and you know he can include Meehan in a lot of this. Well what does that mean RO and is Megan water cooler talk. Table until play and understand what the market setting a new high means of the Dow Jones Industrial Average. I'd tell us if you will professor quick background on that what it is we're talking about it when it means to the average person. Sure the jones' jet is index. Thirty largest. Company's industrial companies in the United States although. It includes some computer companies. And basically. How much the companies are worse than that and that if you own a company. C and prospects for your your business looks good in the coming here. And more people want to buy shares in your company and apple pushed the value of those shares up so. Good Jones is really sort of indicator. How much these large companies are worse. And their values and I think by frequently. Hi how old how well people think that their business is going to be doing into the act that the fact that that jones' opt. Suggests that the market or people were buying and selling stocks. Sink back. The market these companies will be doing well and presumably this is got something to do they think the economy's going to be doing so as when. When a couple of in the country as well economically and these countries typically prosper. Mom is so the Fed disarm are raising interest rates I don't know if they have on evidence economy right now. Would do what does that portend for home buyers people who wanna buy. You need a major purchases like cars etc. Sure. While raised interest rates by quarter point yesterday. He and I think. And that the effect of that has been will be. A lot of loans are high in two. This interest rates. So it's possible that. They'll be slight uptick in the auto loans and in mortgage loans I'd I wouldn't expect it to lead to huge changes. Only because it's such a small increase in the rate. Plot. I would say that it's been so widely anticipated that this really hasn't come as a surprise to anyone people been expecting this to com. The Fed has been very transparent about telling us. What they're going to do they said you can expect a few more you could expect three more of these next year. So we can expect interest rates or at least the federal funds rate to be up by about three quarters of a percent. Next year which suggests that. You know caught the ball will go off by a little bit. So how do you how you. Who work it out her Odyssey economy. In some way balance it off where the interest rates are high enough so people who have money. Can make money in there is an incentive to save it but yet. It doesn't stagnate. I the interest rates become so high that day stagnate borrowing nor are slow it down so much that the economy slows. Is it either or or can both at some point can can work out where both people are happy those that have money. And make a decent return on it and those that need money and don't have the pain exorbitant rate to borrow it. Man this is like the 64000 dollar question. It in monetary policy making. The idea. You know someone once said that the big goal of the Federal Reserve was to take a punch and wait just as the party got go way. It's held the parent term job and they have a dual mandate disposed to promote. Low inflation and and and high employment. So there's supposed to try and stimulate the economy to the extent that they can but they'll also about inflation and job that you pointed out. Did you issue is really is that balance. Yeah you don't want the economy if you want the economy with money and eventually you might see too much inflation and what. He looks to me. Like it that the Federal Reserve is they've got their eyes on inflation and inflation. State law well then they will be less inclined to raise interest rates but the fact of the matter is. The unemployment rate has found naturally it's down to four point 6%. Which suggests that the economy is beginning to do well people think that also long term sustainable interest rate is. A little bit below 5% and were below that now there are worried about too much. About too much economic activity which I know it sounds a bit odd given that given know how many people are still hurting in this country. Professor real quick we only have a minute but I want to tell us about you book. Well the book is about. Bad economic policies over the last. 200 years I picked out nine policies were policy makers thought they were doing the right thing it just completely messed up. And appoint to the book's sort of the bottom line in the book is that. People who make economic policy on the basis that some sort of bearing six ideology usually end up. Making mistakes and the people whose that we can parade hackers or people say who say we must always do acts are always do like. I think we've learned over the last couple hundred years is that. Economic as complicated. As the economy is complicated and different situations call for different measures and so that policy makers. Always have to be looking at that. At that all the bad information and trying to make a decision that thing at the beginning I will always do X or I will never do why. Will looked and added one MO usual while woods is Amazon etc. we're way. And the name of it is wrong nine economic policy disasters and what we can learn from them it was written by our guest. Richard Rosen professor of economics at Wellesley university thank you Cerro we get to talk to again and eBay yet America isn't happy new year.