The Counter-Intuitive Reason Why The Fed May Boost Interest Rates
The Federal Reserve is stumping hard on inflation this week, creating speculation that Fed Funds Rate hikes may be in store for later this month.
This is a counter-intuitive development because increases to the Fed Funds Rate are typically associated with periods of rapid economic expansion.
Lately, we’ve seen anything but.
Witness:
- High levels of unemployment
- Reduced consumer spending
- Falling consumer confidence
Despite the downbeat news, though, multiple Fed members are taking a hard line on inflation, adding that a strong dollar support the economy and help to offset high oil prices.
A rate hike could help accomplish that goal.
If the Federal Reserve votes to raise the Fed Funds Rate, Prime Rate will rise in tandem. Prime Rate is the basis of interest rates for credit cards and home equity credit lines. Holders of each debt type, therefore, would face higher monthly payments.
Mortgage rates, by contrast, would be expected to fall, but how the market would actually react to a rate hike is anyone’s guess.
The Federal Reserve meets 8 times annually. Its next meeting is a two-day affair beginning June 24.
