The Federal Reserve Expects to Raise the Interest Rate in September

Federal Reserve Board Chair Janet Yellen stated on May 22 that she believes “it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy.” Despite the gross domestic product of the first quarter of 2015 not meeting its expected growth rate, the economy continues to climb back, and therefore the Fed made its intent clear on raising the interest rates in 2015. Unless it is met with unexpected changes in the situation, the measure is expected to be enacted as early as September and as late as December. In mid-May, a Bloomberg survey showed that out of 54 economic analysts, 42 anticipate that the raise in the interest rate will happen this September. Ms. Yellen made it clear that the pace of this measure will be “gradual,” and she noted that “If conditions develop as my colleagues and I expect, then the FOMC’s objectives of maximum employment and price stability would best be achieved by proceeding cautiously, which I expect would mean that it will be several years before the federal funds rate would be back to its normal, longer-run level.”*Nevertheless, the end of the era of extremely low interest rates (0 to 0.25 percent) around the world that began in 2008 is now certain. The fact that the Fed is continuously offering forward guidance shows that it is fixed on their plan; it intends to lessen the shock that would come from a sudden rise in the interest rate by letting its inevitable approach be known publically.

What it means for us is that we must be ready for its arrival. When Ben Bernanke, then Federal Reserve chairman, hinted at quantitative easing for the third time back in June 2003, an immense shock was felt throughout the global market as the capital fight raged on. Similar bumps have come and gone since then — and some may believe we now have enough experience to handle such a thing should it happen again — but when the interest rate actually goes up, no one can be certain where the next disaster might come from. In particular, we ought to pay attention to Greece, Turkey and other countries that are constantly facing the danger of going bankrupt.

We also need to take preventive measure to protect the bond and stock market, which flourished due its flexibility, despite the economic growth around the world slowing down. U.S. government bonds, which dropped their profit rate to 1.6 percent earlier this year, has climbed back to 2.2 percent already. Now the profit difference between the U.S. bond and South Korean bond is as low as 0.2 percent. Foreign investors, who recorded 24 trillion Won (currency of South Korea worth about $24 billion) worth of net-purchase this year, have to be kept in check. Preparations have to be made for the case of a currency war between the U.S. dollar, the euro, the Chinese yuan and the Japanese yen as well.

*Editor’s Note: FOMC stands for Federal Open Market Committee, a branch of the U.S. Federal Reserve that determines the course of monetary policy.