Fed Watch: It's Judgement Day

"The Federal Reserve cannot solve all the economy's problems on its own." - Ben Bernanke

It’s Judgement Day…

...Or at least the beginning. Today the Federal Reserve’s Open Markets Committee begins its two-day meeting, during which it will decide whether or not to raise the federal interest rate above the 0.25% threshold for the first time in nearly 10 years.

Recall on Monday we covered what the federal interest rate is, and how it got to its current historically low number. Today, we’ll discuss why the Fed would consider raising the rate, and what a raise would mean for you, the trader, investor and consumer.

Why Would The Fed Increase The Rate?

Like we said Monday, the Fed is mandated to keep the U.S. economy stable. Specifically, they do this by monitoring three main factors: inflation, unemployment and prices, with targets for where each should be.

When the Fed instituted the Zero Interest Rate Policy (keeping the rate as close to zero as possible), the U.S. economy was in the midst of its biggest downturn since The Great Depression. But now that we’re in our seventh year of economic recovery, things are not the same as they were in 2008.

Thus far in 2015, all three of those factors have declined dramatically. Money is cheap, more people have jobs, and prices are stable. In other words, while the economy may not be perfect, you can’t really argue that we’re still in a recession.

And that’s why the Fed is considering a rate hike. The Zero Interest Rate Policy was an emergency measure designed to drag us out of a recession that we are no longer in.

In addition, inflation levels are currently far below the Fed’s 2 percent target. An interest rate bump would slow inflation down and bring it back up to where the Fed wants it to be.

What Does This All Mean?

For one thing, a raise would be a signal that the Fed believes the economic recovery is over, and that we could be moving back to pre-recession interest rate levels.

That is a big statement.

It would also make it it harder for anybody to borrow money. So anything that requires a loan (such as buying a car, college tuition, or paying a mortgage) will likely cost more. The important thing to remember is that, if the Fed is to be believed, a rate hike would be gradual. It’s not going to become impossible overnight to pay back your loans.

A curious byproduct of the Fed talking about raising the federal interest rate, as investors will have noticed, is it causes fluctuation in the stock market.

Every word that comes from the Fed gets endlessly dissected and analyzed, and that attention is reflected in market performance. Recent changes in the market are mostly the result of uncertainty over the Fed’s decision. While there may be some short-term volatility after the announcement, many expect the market to stabilize after Thursday’s announcement.

So...Will They Or Won’t They?

The answer to that question depends on who you ask. September has long been the month many people thought a raise would occur. As recently as two months ago, many economists were sold on this prospect. But factors affecting global markets (think Greece, China, Syria and more), have made others fearful for the U.S. recovery and hesitant toward a rate hike.

But members of the Fed have been wishy-washy in public statements, and some economists have changed their tune. For now, the only thing we can do is sit back and wait until tomorrow.

In the meantime, check out this cool movie about the Federal Reserve and the role it played in the 2008 collapse.