Ask the expert: When will the Fed raise interest rates?
August 31, 2010
Q: When can we expect the Federal Reserve to start raising bank deposit rates?
A: It's important to start by noting that the Federal Reserve does not directly control the rates that banks offer depositors, but its policies certainly have an influence on those rates. For well over a year now, those policies have been to drive interest rates as low as possible.
To get a feel for when the Fed might reverse its low interest rate policies, you should start by thinking about why the Fed implemented these policies in the first place. In large part, it has been an effort to stimulate the economy. The thought is that if you make interest rates lower, people will borrow more, and the resulting spending will jump-start the economy.
This hasn't worked out too well so far. Growth in the U.S. economy has slowed over each of the last two quarters. It seems that households now are more interested in paying down debts than accumulating new ones. Plus, banks aren't particularly keen on lending since many are still sorting out their bad loans from the housing boom.
Rather than deterring the Federal Reserve from its low interest rate policies, the lackluster recovery seems to have reinforced the Fed's commitment to them. So, in answer to your question, low interest rates will probably be with us until either:
- The economy shows signs of sustainable growth.
- Inflation starts to perk up. This would be a bad way to have rates rise, since low growth and inflation are a nasty combination.
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