Suspense, suspense! Will the Fed raise interest rates? Probably not…
What's going on?
The US Federal Reserve (“The Fed”) is meeting on Wednesday this week. This is always a pretty big deal because the Fed sets the interest rate. The interest rate has been at 0% since December 2008. It is expected to stay like this, but still people are always watching the Fed very closely.
What does this mean?
Raising interest rates creates something of an increased headwind for the economy because borrowing money becomes more expensive. People and companies are less likely to borrow and spend money when it is more costly for them to do so. So if the Fed thinks the economy is already slowing down, it is less likely to raise rates. But if interest rates are not raised now (while things are relatively good), it will be impossible during future recessions to lower rates in order to spur the economy. There are also concerns that the exceptionally low interest rates are leading to bubbles in areas like the real estate because investors buy riskier investments in a search for a higher return.
Why should I care?
The US economy has had a relatively weak start to the year. The exceptionally cold weather and the West Coast port strike are two unique factors that have hindered economic growth. The US dollar has also increased significantly in value, which has made it more difficult for US companies that sell their goods overseas.
The question confronting the Fed at the moment is whether the slowdown in US economic growth is due primarily to one-off factors (like the weather and the port strike), or whether there is a deeper slowdown taking effect. If the Fed is concerned that the latter is true, it is more likely to delay raising rates, which would most likely be a positive for US stocks.
Originally posted as part of the Finimize daily email.
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