Borrowers Beware: Here's Why the Fed is Poised to Raise Interest Rates

Higher interest rates are coming. It’s just a matter of weeks, according to a fairly wide consensus among Federal Reserve watchers.
This means the central bank’s policy makers will raise short-term rates for the first time in nearly a decade, and the first time above “near zero” since the financial crisis of 2008.

A new phase of higher rates on mortgages and car loans loom large for consumers, most of whom have only recently regained confidence in the economy as the jobs and housing markets strengthen. But steeper borrowing costs for both consumers and businesses could slow down the recovery, creating a balancing act for the Fed to consider carefully.
After another strong U.S. jobs report for July, economists say the Fed seems all but sure to raise its short-term interest rate next month.
It would be the first rate hike since 2006.
Some economists say that a September rate increase isn’t guaranteed. Employment data shows that some gauges of the job market remain weak. Pay increases, for one measure, are still sluggish. And hiring hasn’t benefited millions of Americans who’ve essentially given up on their job searches.
Moreover, strong dollar is hurting U.S. exporters and making foreign goods cheaper in the United States. That could reduce inflation even further below the Fed’s 2 percent target rate.
“A September rate hike is by no means a done deal,” Chris Williamson, chief economist at Markit, said in a research note. “Low inflation and cooling growth will create powerful arguments against rate hikes.”
But the consensus still points to a rate hike. Here are the main factors in favor of a raise:
Job growth: Consistent job gains have helped reduce the unemployment rate to 5.3 percent, from 6.2 percent a year ago and 10 percent in 2009. That’s close enough to the 5 percent to 5.2 percent range that the Fed deems to constitute a normal employment market.
Fed Flexibility: While economic growth is still modest, the Fed’s policy makers need to raise rates from their record lows sooner, rather than later. Rates that are positioned too low for too long gives the central bank less wiggle room if another economic crisis were to occur. The Fed’s “near zero” rate posture has been in effect for a striking seven years.

The Dollar and Inflation:
The U.S. dollar has surged about 14 percent in the past year, compared with overseas currencies. That makes imported cars and other products cheaper than U.S.-made products. And that’s also depressing an already unusually low inflation rate. Consumer prices rose just 0.1 percent in June compared with a year ago. Excluding the volatile food and gas categories, they’ve increased only 1.8 percent. While low inflation is a good thing for consumers, the Fed’s seeks at least some limited inflation as protection against deflation, which can pull down wages, force consumers to pull back on purchases and make debts harder to pay off.

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