It’s a foregone conclusion in the financial world-- the Federal Reserve is going to begin raising interest rates soon. The big question is…when?
In 2008, the Ben Bernanke-led Fed slashed short-term rates to basically zero during the height of the financial crisis, as the global economic system teetered on collapse. The move was designed to pump much-needed liquidity into the economy. The Fed then followed that with several versions of “Quantitative Easing”-- bond buying programs that poured trillions of dollars into circulation.
But those “QE” purchases ended in October. And with the recovery well underway, the now Janet Yellen-led Fed is looking to finally start tightening the money supply without throwing a monkey wrench into the comeback.
So why do anything? After all, things are going so well.
Yahoo Finance Senior Columnist Michael Santoli says that’s the point.
“This zero interest rate, emergency stimulus policy really was for an economy in distress,” he notes. “With the job market getting better, the recovery underway, they don’t want to be sending the signal that the economy needs that kind of extraordinary help anymore.”
Plus, Santoli says, these super-low rates take an important weapon out of the Fed’s arsenal.
“They want to plan in a very measured way for the next recession,” he points out. “And you need rates to be higher if you’re going to be cutting them to forestall a future recession.”
Santoli believes the Fed will start raising rates in the second half of 2015. But don’t expect policymakers to rush into it.
“They have been very clear they are in no hurry,” he explains. “They’ve had this language in their statements that they will probably keep interest rates low for a considerable period after stopping the QE bond buying program. So I think they want to prepare the markets for this a little bit.”
In their most-recent statement, the Fed members said they can be "patient in beginning to normalize the stance of monetary policy."
Santoli also feels that even when they do begin raising rates, the policymakers will keep the markets guessing about how far and how fast.
“Too much predictability is not good-- it makes you take too much risk, that led to the financial crisis,” he says. “So I don’t think they want to send the signal that they are going to be clear exactly how this pace is going to go.”
As for how rising short-term interest rates will affect consumers, Santoli says the jury is still out.
“It all depends on how long-term interest rates react,” he says. “If the 10-year bond yield stays about where it is, then general borrowing costs on cars and houses and things like that will stay contained. But if the markets panic and the long-term rates shoot higher, that theoretically could choke off a housing market recovery, like it kind of did in 2013.”