Shaken recently by stock markets across the globe, the U.S. Federal Reserve ("Fed") may delay moving the economy away from its emergency monetary policies begun in 2008. In the 102 years of the Fed's existence, this organization has never so vigorously attempted to stimulate the U.S. economy with what many economists consider crisis measures.
Since 2008, the Fed purchased $4.5 trillion in U.S. Treasury bonds and mortgage backed securities intending to lower long-term interest rates and boost U.S. investment and consumption. Additionally, the Fed's interest rate setting committee, the FOMC, has kept short-term interest rates at close to zero for almost seven years.
Partially as a result of these measures, U.S. stock prices collectively have climbed at a pace six times that of the U.S. inflation adjusted economy since 2011 (3.5 times the non-inflation adjusted economy). And just last month, even the threat of a rate hike of ¼% slammed U.S. stock prices. However, raising interest rates at the FOMC's September 17 meeting will have several significant positive impacts.
First, savers will see a "light at the end of the tunnel" in terms of interest earnings. Second, rising interest rates will encourage businesses and home buyers to invest today in new capital equipment and homes in advance of rising interest rates. Third, it will help restore confidence in the U.S. economy that has been curbed by emergency interest rates. Fourth, and most importantly, it will begin the journey back to normal and sustainable interest rates.
Higher interest rates may well dampen stock prices, but the mandate of the Federal Reserve is to stimulate employment growth and promote stable prices. It is not to enrich stock market participants with price bubbles that must ultimately deflate, slowly or rapidly.
Ernie Goss
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