The Federal Reserve’s path to a rate increase is a treacherous one: a path paved with easy money from other global central banks and lined with a gauntlet of possible hazards. The markets may not believe the Fed will actually raise interest rates this year, but it may surprise them with at least one hike late in the year. In fact, there could be up to a 40% chance of a rate hike this year, and while most economists do see a rate rise, they don’t necessarily agree on the timing.
The U.S. economy is stronger than others, so why can’t the Fed raise rates? One reason is that those central bank easing programs in Europe and Japan work to suppress interest rates and, in some cases, intentionally turn them negative. In response, their currencies should weaken and the dollar strengthen, which it has before when the Fed moves forward to boost U.S. interest rates.
A stronger dollar has been a problem for the Fed in the past, as was the case when it helped trigger China’s sudden devaluation last summer. It also has depressed commodity prices in the past, which is an issue considering commodities are important sources of revenue in emerging economies. A strong currency also hurts U.S. exports. While the Fed figures out the next move, we can only speculate that the health of the U.S. economy may not be the only factor keeping rates from increasing.
What do you think about a possible rate increase? Feel free to reach out to me – I would love to discuss this potential change with you and help you figure out the best way to save money on your next home purchase.