In one of the best-telegraphed moves in history, the Federal Reserve Open Market Committee has voted to raise the Federal Funds interest rate by 0.25%.
The tiny rate hike is significant only because the Fed has kept the rate at 0% since 2008, part of its effort to keep the economy on life support in the wake of the financial crisis and Great Recession.
After several false starts – Wall Street thought it would happen in September – there was little doubt the Fed would move at the December meeting. The only question was whether it should raise rates. There are plenty of economists who argued against it.
The reason? The economy is still weak and inflation is nowhere in sight. In the past the Fed has raised rates to dampen inflation and cool an overheating economy. That’s clearly not the environment now.
So why raise?
So why is the Fed doing it? Some have speculated that, as bizarre as this might sound, the Fed wants higher rates so it can lower them again if the economy begins to falter.
Former Obama Administration economic advisor Larry Summers has argued on his blog that raising rates now, just for the sake of raising rates, is a serious mistake, especially if it slows an already slow economy.
“There is certainly a real risk that slow speed becomes stall speed becomes recession,” Summers wrote. “On average mature recoveries like the present one last less than an additional three years. And given how low rates are and the political aversion to the use of fiscal policy a substantial slowdown could have very severe consequences.”
Impact on consumers
In truth, whether this rate hike shoves the economy into a recession is by far the biggest potential impact it will have on consumers. While it is true that credit card rates are often influenced by the Federal Fund Rate, a quarter percent rise is unlikely to be noticed much if you’re already paying about 15% on your balance.
And yes, if you have a savings account at your local bank, you might see a little more interest – but a tiny bit.
Consumers who own stocks and bonds will also feel the impact. In anticipation of the Fed rate hike, the value of “junk,” or high-risk bonds, has plunged in recent weeks. Some think stocks are poised for a sell-off over the next few months.
A Bank of America poll of fund managers found 58% expect the Fed to raise rates three more times in the coming 12 months. A net 43% of regional fund managers expect China’s economy to weaken in 2016, up from a net 4% last month.
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