When Should The Fed Start to Raise Rates?

by Justin Weinger on December 15, 2009

According to an article by Chris Isidore of CNNMoney.com, a vast majority of economists expect that the United States Federal Reserve will keep its overnight lending rate – to which many home equity and credit cards interest rates are tied – near 0% through 2010 and into 2011.

Obviously, this is great news for those of us to have any loans tied to the Federal Funds rate, since lower rates obviously mean lower (required) monthly payments. It is assumed that this decreased interest stress on consumers will help to spur more consumer and business spending. Since consumer spending accounts for nearly three-quarters of the U.S. GDP, this could ultimately be the thing that brings our economy completely out of “The Great Recession.”

Unfortunately, keeping rates this low has for what will likely be close to two years, has a negative impact on two fronts:

  1. It hurts those who depend on interest from their money market and savings account as income, for example, many retirees. Not only are many consumer loans pegged to the Federal Funds rate – as stated above – but so too are most interest bearing savings accounts. So, as long as these rates are low, people who depend on this income will have to learn to get by with little to no margin for surprise expenses.
  2. It fosters long-term inflation due to the increased availability of money in the economy. Currently, with the credit crunch still having lingering effects, inflation has been relatively tame. However, since many of the extraordinary efforts to keep the country – and the world for that matter – out of a depression have been centered around pumping massive amounts of money into the economy, there is a very good chance we will all face very strong inflationary pressures once the economic rebound solidifies.

Based on the current view of economists, it appears that the Federal reserve would rather wait for inflationary pressures to come to fruition before raising rates as opposed to risk raising rates too early and undoing all of the work they’ve done so far.

I’m torn on when rates should start to increase, although, I’m currently leaning towards wanting them raised sooner rather than later. When do you think rates should start to climb? Leave your thoughts below.

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