You may not realize it, but a very important event happened last September 20th and 21st. It was something that could potentially have a significant impact on our economy—and yet the average person doesn’t even know about it. The Federal Open Market Committee (FOMC) had their September meeting. What does that entail, and how does it affect you? Let’s take a closer look at the ramifications.
The FOMC and the Federal Reserve
The FOMC is part of the Federal Reserve Board, the central bank of the U.S. It’s their job to keep our country on firm financial footing through a variety of measures.
The FOMC is the Fed branch that dictates monetary policy, and the committee itself consists of the seven members of Fed’s board of governors, plus the presidents of five reserve banks, who rotate out annually. The committee meets eight times per year and make a number of important decisions. But perhaps the most important one is whether to raise or lower the federal interest rate.
For seven years following the 2008 financial collapse, the federal interest rate remained at essentially zero. This was to help the economy recover and grow stronger. By making it virtually free for banks to borrow money from the Fed, they could in turn make it extremely cheap for ordinary Americans to take out mortgages, hold credit cards, etc.
Then in December of 2015, the FOMC decided that the economy had finally recovered enough to raise the rate. They started small, moving from a range of 0-0.25% to 0.25-0.5%. However, they speculated that they’d be raising the rate again over the course of the year—possibly up to four more times. So far they haven’t done so, but this latest meeting was another opportunity, and financial experts have been anticipating it with trepidation.
The Results of an Interest Rate Hike
Raising the federal interest rate isn’t in and of itself a bad thing. However, under the wrong circumstances, it can have disastrous repercussions for the rest of the country. It begins with the FOMC making it more expensive for the banks to borrow money from the Federal Reserve.
As a result, banks and credit unions raise interest rates for their customers. Mortgages and credit cards begin to cost more, cutting into the average citizen’s disposable income. Since they have less money to spend, businesses begin to suffer, and the stock market goes down as well. Those companies in turn aren’t able to expand the way they’d like to. Economic growth goes down, prices go up, and wages stay the same. Ultimately, the economy is plunged into a recession.
Of course, that isn’t necessarily always the way things progress after an interest rate hike. It only reaches those levels when the economy is too fragile to handle the higher rates. However, our current economy is in a precarious position, and likely isn’t strong enough to handle the change. Even the announcement of a possible increase causes significant drops in the stock market, in anticipation of what’s to come.
This is probably why the FOMC is still keeping the interest rate so low, even after saying that they hoped to raise it again. Indeed, the September meeting again ended with their voting against another rate hike. However, it was a point of some disagreement among some of the members. Several feel our economic growth has reached the point where the country could sustain another increase. However, many experts are worried that it could upset our country’s already delicate financial situation and cause another economic collapse.
There are still two meetings left this year: November 1 – 2, and another on December 13 – 14. It seems unlikely that the FOMC would approve a rate increase in November, so close to the Presidential election, but it’s very possible that one could be in store for December. Whether or not the economy is prepared for it remains to be seen, but the potential for economic fallout is significant. Plan your investments accordingly.