Fed Rate Hike Paints an Uncertain Future

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One of the most significant decisions in the nation’s economy might be nearing its execution, as almost everyone agrees that the conditions have now been met for Federal Reserve to lift interest rates for the first time in close to a decade.

Encouraging Data

The wait for such move has been so long that some of the Wall Street traders have been working with near zero rates for their entire professional career, making this a completely new experience for them. The rates have been near zero since the last big financial crises in 2008. Keeping rates at 0 percent to 0.25 percent, the U.S. central bank has pushed economy in the direction of creating more jobs and keeping inflation at its targeted 2 percent rate.

The delay in increasing the interest rates has been the result of the wait for more concrete evidence that the inflation in the country will get back to its target. As described by Fed officials, the institution is dependent on data and has been waiting for clear signals before making a move. The second half of the year has proven good for the economy, as the data kept confirming that the reasons for any further delay are becoming fewer and fewer. Growth has been steady, with sales in retail showing that consumers are exhibiting more confidence.

Broken Link

However, unlike with previous hikes, the direct link that existed between Fed’s interest rates and all interest rates in the economy might turn out to be broken. This could cause the central bank to lose control partly, if not completely, ensuring that the period following the rate hike could prove to be turbulent.

Another challenge will be to convince investors that the hikes in interest rates will be gradual, as faster increases could not only stifle the country’s economy, but also seriously affect emerging economies. While the future is uncertain, it will probably be clearer once the Fed comments on the actual timing of upcoming interest rate increases.

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