December Trend

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Why December Is Looking Likelier for the Fed to Raise Interest Rates

One of these days, the Federal Reserve tells us, it will decide to raise interest rates.

The announcement will be akin to a doctor’s decision that a patient is well enough to be gradually taken off medication. The thinking inside the Fed is that the economy is finally healthy enough that borrowing costs should return to more “normal” levels to help keep future inflation from accelerating too much.

But it is a moment with challenges. It could send markets into a tizzy (if past experience is any guide), lead to a slower economic recovery and make it harder for workers to press for higher wages. For savers, it could signal higher returns, but those borrowing to buy a house or a car may soon have to pay more.

Nearly seven years ago the Fed put its benchmark interest rate close to zero as a way to bolster the economy. And for months now, officials have said they might raise rates by the end of 2015. Recent statements underscore an intention to act at their final meeting of the year, in December.

It’s a “liftoff” – to use the Fed’s own term – that’s getting the kind of attention that space aficionados once lavished on NASA rockets. Fed officials left rates unchanged after meeting in October, but when they do make their announcement, it will have lasting consequences.

The last time the Fed raised interest rates, in June 2006.

Since Dec. 16, 2008, the Fed has kept its benchmark interest rate at a range between zero and one-quarter percent. The move was announced in the gloom of the longest recession since World War II, as jobs were being squeezed out of the economy like water from a sponge. Ten days earlier, the government announced the United States economy shrank by 533,000 jobs in the previous month, the largest one-month loss since 1974. (The number was actually far worse; it was later revised to a loss of 765,000 jobs.)

By pushing the rate to the floor, the Fed went as far as it could with its main tool for guiding the economy: setting a target range on the federal funds rate, or the amount banks charge each other for overnight loans. The rate is set by the central bank through its buying and selling of short-term Treasuries – i.o.u.s from the government – mostly in trades with commercial banks.

The Fed used other means to prop up the economy, notably buying mortgage securities and other bonds to help bring down long-term rates further. The strategy, known as quantitative easing, encouraged more borrowing and lending, led to a stock market boom and, the Fed contends, eventually helped bring about a sustained economic expansion. Convinced that it has done as much as it considers prudent, the Fed is no longer expanding the size of its balance sheet, which reached $4.5 trillion.

Still, while the economy has rebounded, certain aspects of the recovery – like the housing sector, work force participation, and hourly wages – are spotty at best. Since March, Fed officials have said they expect to raise interest rates sometime before the end of the year.

So When Might the Fed Announce a Higher Target?

The action will most likely be taken on Dec. 16. That’s when the Federal Open Market Committee, the Fed policy-making group that sets the target rate, concludes its next two-day meeting. Janet L. Yellen, the Fed chairwoman, is scheduled to hold a news conference that afternoon. (In the unlikely event that policy makers take no action, the next meeting dates are Jan. 26-27 and March 15-16.)

Confidence in jobs growth has replaced worries generated by last summer’s turmoil in the global economy. The slowing Chinese economy and devaluation of the renminbi, the slumping price of oil, jarring downturns in the global stock markets had all prompted questions over when will be the best time for the Fed to raise interest rates.

Source: New York Times


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