The U.S. Federal Reserve met on August 1st, and the main take away from the meeting was that the benchmark interest rate will remain unchanged. However, the Fed did reaffirm the notion that they do expect to raise interest rates two more times this year, with the first increase occurring in September. Strengthening that notion, according to a Bloomberg study, traders believe there is a 92% probability that the Fed will raise the Fed funds rate to a range of 2% to 2.25% in September, and a 71% chance of an additional hike in December. Currently the Fed funds rate sits at a range of 1.75% to 2%.
Why raise rates? Raising rates is primarily an indication that the economy is growing at a strong enough pace to support it. In fact, the economy grew at a pace of 4.1% in the 2nd quarter, its best showing in nearly four years. Fed Chairman Jerome Powell furthered that notion, going on to say the economy is in a “really good place” and pledged to continue with gradual increases in borrowing costs in order to maintain the second-longest U.S. economic expansion on record. Increased participation in the labor market and record-low unemployment are two of the key driving indicators in determining a strong economy. In addition, the Fed announced that there has been strong growth in household spending and business fixed investment.
Takeaway: Although higher rates will make it a little more costly to borrow funds, sometimes you have to look at the bigger picture. A healthy and strong economy as a whole will ultimately have a much more positive impact on our overall lives.
Sources:
https://read.bi/2B7GtcV
https://cnb.cx/2Mch86O
By: Jon Iacono