When the financial crisis struck, interest rates hadn’t increased for many years already. The Federal Reserve uses interest rates to help keep the economy in check. If the economy heats up, rates might increase to keep things from getting out of hand. Likewise, during a recession lower rates might encourage borrowing and spending.
That trend of flat rates of virtually 0% has been a critical support for the economy, even today. But, markets and the finance world have known for some time that the days of 0% rates are numbered. They watch with bated breath when the Fed makes announcements, for any changes in phrasing that may give them a clue about the future. Yesterday, it was all about the word “patient“. In this case, the lack of “patient” appearing in their official statement about their actions on interest rates. This signals that the Fed is gearing up for finally raising rates.
And it’s about time.
We don’t need to get into the mechanics of how this interest rate affects all other rates. Just understand that the impact is more than symbolic, but the symbolism alone is enough to set off a chain reaction of the eventual increase in interest rates all over the economy.
It signals that the Federal Reserve understands that the economy is getting ready to stand on its own two feet. That’s right, we’ve been on crutches all this time. Assuming rates do rise, this could make borrowing more expensive. More expensive borrowing can slow down the economy. Likewise, the rates banks are willing to pay you for your savings would eventually rise. This encourages saving over spending, which would also have economic impacts.
Even a small gesture of increased rates will be carefully communicated. You can see in the trends that the Fed doesn’t like to raise rates one month then cut them the next. Market observers understand that an increase in 6 months likely means rates will be even higher in 12 months, 18 months, and so on.
This has been a long time coming. And it’s been predicted every year for the last few years. 2015 is looking serious.