Interest rate increase and the impact on 2016

This is a rush transcript from "Special Report," December 16, 2015. This copy may not be in its final form and may be updated.


JANET YELLEN, FEDERAL RESERVE CHAIR: Were the FOMC To delay the start of policy normalization for too long we would likely end up having to tighten policy relatively abruptly at some point to keep the economy from overheating and inflation from significantly overshooting our objective. Such an abrupt tightening could increase the risk of pushing the economy into recession. Even after today's increase, the stance of monetary policy remains accommodative.


BRET BAIER, ANCHOR: It's tough to get through some of those Fed press conferences, but today was interesting in part because it's the first fed rate hike in more than nine years. It's only a modest a quarter of a percent. But it does mean that things are changing. And what does that mean in the big picture? We're back with the panel. Julia, the sense is that the economy is starting to get moving and that this is a sign that the Fed is feeling more confident. But it's not total confidence.

JULIE PACE, ASSOCIATED PRESS: Yes. It's not, because this is a very cautious plan for raising rates. It's a quarter of a percentage of a point now and they say they will continue to raise rates over time, and if the economy reacts poorly they can stop that plan.

For most people right now, they are not going to feel a huge impact, but the bigger question, especially as you put this in the context of an election year, is if the economy does react poorly to this next year, I think it's going to be tough on Democrats in particular who have been arguing that the economy is on acome back and has stabilized for sure, it will make it difficult to prove that that was real, that that wasn't just kind of kabuki economics, that that was a real recovery. And that's really the heart of Obama and now Clinton's economic message.

BAIER: One thing that gets lost is when interest rates go up, while it's a good sign for the economy but it's not a good sign for the debt because the national debt is over $18 trillion. If it goes up one full point we start paying more interest on the national debt than we pay for defense spending at the Pentagon per year.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: But as Yellen indicated, I mean, you have to do something like this. And if you wait it's going to get a lot worse later including what will be the ultimate interest rate in the end that will increase our interest payment.

Look, we have had three immense stimuli on the economy, which is, a, the low interest rates of zero, b, which is the fiscal stimulus. Since Obama came into office, $8 trillion of debt averaging between a $1.5 trillion and now half a trillion which is considered a small deficit.

And the last is oil prices at $35. Now, if you have got an economy running on this and we are still only chugging along at two percent, that means economy really is in trouble. And, unless you start to take away the punch bowl, and this is a very, very small amount, this is a teaspoon's worth of removing stimulus, you are going to go deeply into a danger zone. It had to be done. They have signaled it will go up about 1 percent more over the next year, which seems to me to be exactly right in a fragile economy.

BAIER: Steve?

STEVE HAYES, THE WEEKLY STANDARD: I think Charles is exactly right. If you look at where we are economically, it's not as if we are humming along. Nobody is celebrating where the economy is right now. There is talk of full employment, but you look at the labor force participation rate and that makes the talk of full employment seem foolish. And people are excited about 2.1 GDP growth. That's nothing to get excited about.

But this had to happen, first of all because they signaled it was going to happen, and secondly because it's long overdue. You can't keep operating on what in effect were emergency moves in perpetuity. That had to change. It's going to change. She certainly signaled that it was going to be slower.

I think what this does, though, is it introduces two issues or it makes more urgent two issues in the presidential race. One is tax reform, pro-growth tax reform, fiscal policy. What is Washington going to it do to change this stagnant economy? And, two, entitlement reform because, as you suggest, you look at taking up of interesting rates even a quarter point or a full point, you are talking about, once again, this debt bomb that we are facing, $18 trillion plus. There haven't been significant reforms to our entitlement programs. Everybody knows that that's what's going to happen if you are going to solve the debt issue. This makes that more urgent. People haven't been talking about debt the way that they were four years, three years ago, three years ago. But they need to be again.

BAIER: Yes. Quickly, does this effect Hillary Clinton? Is this a sign of good things for her? Is it bad sign?

PACE: I think it depends on what happens with the economy next year. I think if you have the interest rates start to creep up a bit and you don't see a measurable impact on the economy, it probably has no effect. If the economy does start to suffer, I think it could possibly have a negative effect for her.

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