Raised Rates Ahead

By Jorge Ortiz  According to the Federal Fund rate “The federal funds rate is an important benchmark in financial markets. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.”

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The federal fund rate is the only national rate that the Federal Reserve controls. The next meeting with their board of governors is going to be this coming Dec. 15 and 16, and their decision will impact the national economy in a drastic way. The decision balances between inflation or growth. In the past six and a half years, the interest rate has been close to zero and during that time the national inflation rate has been stable at a rate of less than 2 percent. while the national growth rate is slow.

The Fed adopted this monetary policy in order to survive the past recession by letting the banks lend and borrow money at a lower interest rate in order to motivate the economy. According to the theory, if the banks get the money in a cheaper manner, the banks would be able to lend this money with a better interest rate. Therefore, the people and businesses would be able borrow more money in order to create jobs and increase the consumption. On the other hand, when the rates are low, the banks do not pay much to hold the money of their customers and that affects trades and the stock market. Due to these reasons, the Fed has been considering an increase in the rate.

Indeed, it is a moment with challenges and raising the rate could benefit savers and investors, but those borrowing money to buy houses or cars may have to pay more. Due to slow economy recovery and the workers pressing for higher wages, the United States economy seems to be stable, but the results of these past years are unsatisfying to the public.

The Fed's mission is to motivate economic growth, which would affect global markets such as China and the European Union. Keeping the rate close to zero would stabilize the economy in the long term in a way that wouldn’t get the growth that the Fed is looking for. The labor force seems to maintain unstable, as a matter of fact, labor participation rate is at 63.2 percent, which is at its lowest in our generation. Two thirds of all new hires over the last year are temporary employees. It seems that 2016 would be the year for a rate hike hoping for progression in both employment and labor.