When you head to the bank for an operating loan this year, it might be more expensive than in years past. The Federal Open Market Committee (FOMC), a committee of the Federal Reserve, raised interest rates for the first time in nearly a decade in December. The higher rates probably won’t affect your ability to borrow and, unfortunately, are unlikely to mean more money in your savings accounts. However, that could change if rates continue to increase throughout 2016, as many economists expect.
The Federal Reserve issued a statement saying the committee decided to raise interest in December rates because “there has been considerable improvement in labor market conditions this year, and (the FOMC) is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective.”
The increase illustrates the belief by the central bank that the U.S. economy is gaining strength and no longer needs the crutch of near-zero rates, according to Matthew Monteiro, vice president finance and treasurer of Mid-America Farm Credit.
The FOMC passed the increase with a unanimous vote and hinted at increasing rates throughout 2016. The committee’s first meeting of the year was scheduled for Jan. 26.
“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” they said in the December statement. “The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
In a statement, Jefferey Lacker, a committee member from Richmond who voted in favor of the December increase, said it’s too soon to know if rates will rise in the near term. But he warns they could at any time.
“The public should think of every meeting as a live one, one at which we could decide to raise rates if conditions warrant it,” he said.
Dr. Ed Seifreid, chief economist and strategic advisor at BNK Advisory Group, says rates will rise but the increments will be gradual.
“Don’t expect spikes,” he says. “It’s going to be very slow, gradual. You can expect this low-rate environment for some time.”
Could the rate stay the same? It’s possible, but not probable. Each year four members of the FOMC rotate out of voting power on the committee. All four rotating members who voted in December were very vocal about the need to keep rates the same because of economic concerns, according to Seifried.
The four members new to the vote in 2016 are James Bullard, Esther George, Loretta Mester and Eric Rosengren. Bullard, George, and Mester all called for a rate hike before the September meeting, even while colleagues begged for a delay, according to Seifried.
“Next year the voting members of the FOMC will be hawkish,” he says. “New voting members of the committee will push for higher rates.”
Upcoming 2016 meetings for the Federal Reserve’s Federal Open Market Committee: