By: Dr. Lynn Reaser
The Federal Reserve has held interest rates near zero since the financial crisis struck at the end of 2008. It has been an extraordinary period, giving homebuyers the opportunity to lock in record low mortgage rates, while boosting the stock market to all-time highs.
This rare period of history may be drawing to a close. Look for the Federal Reserve to begin raising rates towards the middle of next year. The economy should be strong enough to support the gradual return to a more “normal” monetary policy. Real gross national product (GDP) should be growing at an annual rate closer to 3% rather than 2%, while the job market improves further. With the respite from sequestration of at least two years, fiscal drag will be less than expected. Meanwhile, the U.S. economy seems to be weathering international turbulence, ranging from problems in some of the emerging market economies to conflict with the Russians.
Delaying the upward move of interest rates could raise the risk of either asset bubbles or future inflation. Nearly seven years of zero interest rates will be enough, with the risks outweighing the benefits.