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Since early 2014, the U.S. Central Bank has been in the process of easing the economy into a rising interest rates program. In an effort to contract the economy while it’s still recovering, the main goal of this initiative is to gently maneuver the United States into a more stable fiscal state, and out of the transitional zone it is currently in. The Federal Funds Rate (FFR) has been flat at a historic rock bottom 0.25% for about six years now, following the financial crisis of 2008. Economic analysts and investors alike are dubious about the unprecedented situation in which the Fed will try to raise rates from such a low point, partially playing it by ear.
Originally planned to take effect in the fall of 2015 or later, there is a shifting speculation by major American banks that an increase as high as 0.25% could take place as early as June 2015. After the latest, successful round of the Fed's quantitative easing program, it seems as though this rate increase should be the next obvious and welcome step, but even such a slight increase could prove harmful for the American stock market. Historically, U.S. stocks have struggled to keep up with inflation during periods of tightening monetary policy. Analysts, based off of past events, are predicting a harsh pullback in the market's post rate hike, and a 5% decline of the S&P 500 within the first few months of the program.
The situation remains fairly daunting for anyone who has a stake in the stock market; more American investors are taking their long-term trade strategies to other markets entirely, while foreign investors are becoming less likely to enter, or stay, in an increasingly volatile market. Conversely, the exchange rates of several large economies affected by the rising rates could lead to a higher level of competition in the currencies of America's major trade partners. However, the USD is likely to become a stronger currency with heightened appreciation over time. This little bit of good news is currently the only silver lining for the American economy. Even now, the Fed is waiting to make any actionable decisions. They are trying to feel it out as best as they can, but investors are becoming restless waiting, not being able to make any decisions of their own for the time being.
Despite the Federal Reserve’s hesitance in actually implementing the long-awaited program, it is trying to pull this plan off without backsliding into another economic bubble. The outcome, for even the first round of 0.25% rate hike, is largely unpredictable and only time will give a definitive result that the Central Bank can work with moving forward.
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