As expected the Federal Reserve voted to keep interest rates unchanged at its most recent Open Market Committee meeting last week. This comes after four rate increases in the Federal Funds Rate since they began raising interest rates in December of 2015.
The Federal Funds Rate remains at 1.25%. The next FOMC meeting is scheduled for September 19-20 when many Fed watchers predict another increase or possibly a change in tactics.
In addition to keeping rates unchanged, the Fed may begin selling assets on its massive balance sheet – currently estimated at over $4.5 trillion, up from $800 billion prior to the financial crisis.
This could signal a shift in how they choose to meet their dual mandate of 2% inflation and “maximum sustainable employment” which is generally considered to be about 5%.
Naturally, the Fed doesn’t say when they may start unwinding their balance sheet, just that it could be “relatively soon”.
So far, markets have taken the rate increases and talk of shrinking the balance sheet in stride.
A matter of perspective. How Fed policy effects you depends on your point of view. For people living off of fixed interest from CDs and other bank savings a rate increase should result in slightly higher interest rates on your savings. Back in the 1980’s when interest rates were at their highest, so were CD rates with some paying as much as 17%. In 2006 before the Fed started lowering rates from 5.25% to 0.25% bank CDs paid about 5%.
On the other hand, if you have a HELOC, credit cards or other types of debt, rate increases by the Fed could result in higher monthly payments for you as the interest you pay on the debt you owe rises.
A bit of history. The Federal Funds Rate remains at historically low levels. Prior to the financial crisis of 2007/2008 the Fed Funds Rate was 5.25%. We’ve got a long way to go before we get back to pre-crisis levels, but even then they were low compared to the late 1970’s and early 1980’s when interest rates were as high as 20%!