The US economy has perked up recently: an average of almost 250,000 jobs have been added per month so far this year, a substantially faster pace than any other year in the past decade. As a result, the Federal Reserve has shifted its focus away from trying to stimulate the economy and toward potentially raising interest rates. Raising rates would have some impact on essentially every investment, affecting bond prices, stock valuations, the general economic outlook, and even the how much interest your bank pays on savings accounts.
So when will the Fed end its policy of close to 0% interest rates that’s been in place for the past 6 years? The Fed’s most recent statement on its interest rate policy said it can be “patient,” suggesting that it won’t start raising rates until the middle of 2015. Financial markets seem to agree with this outlook: futures prices, which can be used to calculate when investors think interest rates will rise, indicate that the Fed isn’t likely to start raising rates until the summer.
Even when interest rates start to rise, however, they’re likely to rise slowly. History suggests that the Fed prefers to make small, incremental changes rather than sudden, large shifts (the financial crisis in 2008, when the Fed dramatically slashed interest rates, was a notable exception). Most Fed policymakers think that rates won’t return to a more “normal” 3% to 4% level until 2017.
There’s also the possibility that interest-rate rises won’t get very far before the economy starts to lose steam. The euro zone, Sweden, Norway, and Australia have all suffered that fate in recent years. The US could face a similar situation if the Fed overestimates the strength of the economy and raises rates too soon.