By Parth Parikh,
Money and Investing Writer
The million-dollar question in the financial world may finally be answered in December when the Federal Reserve meets to figure out if and by how much will they raise interest rates.
The meeting on Dec. 16 has a greater impact on the financial world than any other Fed meeting because there is a more likely chance that this is the meeting where rates will be hiked.
Interest rates are also known as the federal funds rate, a percent rate that banks must comply with when they exchange money with the Federal Reserve, whether banks borrow money or deposit into the Reserve.
The federal interest rate is important because the impact these rates have can change a lot. Higher interest rates can raise bond yields, lowering the price of bonds, and hurt the stock market.
With higher interest rates, products and services created domestically become more competitive in the world market and has the power of raising our GDP from its current low point.
Interest rates have also been a topic of discussion, dating back to the recession of 2008.
The bursting of the housing bubble sparked a worldwide selloff of mortgage-backed securities and brought down the largest of banks, such as Bear Stearns, Lehman Brothers, AIG (NYSE: AIG) and Merrill Lynch.
Since then, the Fed has dropped the interest rate to near-zero, hoping that the markets will improve to pre-recession times.
But many issues stood in its way, such as the Greece debt problem. Earlier in the year, the bankrupt nation faced payment deadlines on its loans from the EU and the International Monetary Fund, which they could not pay back.
Another issue was the EU having a hard time getting productivity back on track as companies were still nervous about resuming normal business activity after the recession, which led to the EU going through a massive quantitative easing program, buying bonds and adding money to the economy.
New problems like China’s economy, which during the summer devalued their currency, the yuan, shaking the world markets for weeks, and the strengthening of our dollar as a result of many developing nations devaluing their currencies in preparation for a US interest rate hike.
With all these issues, the Fed hasn’t found the right signs to raise interest rates. But that all changed on November 6 when the most recent jobs report came out.
After a yearly average of 230,000 jobs being created a month and an analyst expectation of 180,000 jobs, the October jobs report beat expectations with a stellar 271,000 jobs created in one month.
Adding to the report was the unemployment rate, which dropped below five percent for the first time since 2008.
The encouraging jobs report will help fuel the Fed’s decision to lift rates, considering China’s markets are back to pre-devaluation levels and Greece struck a few deals with the EU and the IMF to pay back their debts at a later date.
Experts are seeing a slight increase in rates to see how the economy would respond, while a select few are seeing a more gradual change in the near future.
Bloomberg is projecting a sixty-six percent chance the rates climb on December 16, along with a 66 percent chance that the rates will climb from near-zero to .75 percent.
On Dec. 17, we’ll know what the Fed decides and what that could mean for the rest of the world.
A version of this article appeared in the Tuesday, November 17th print edition.
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