If the FED raises rates this December, it will be the first time since June of 2006. Top economists and market participants now expect it and interest rates for Treasury Bonds and Mortgages have already increased .30% since Oct 14th in response.
So what will happen if the FED does raise rates in December? Many experienced professionals, including myself expect that rates will continue to increase leading up to this, but will level off after the new year and possibly even come back down in 2016. Reason being, they are likely to only raise .250% and then hold tight for a while, meaning they will not continue to raise rates. The markets have already absorbed the .250% and unless the economic data show continued strength and increased inflation the FED would not need to raise the rates further. In fact, they could lower the rate back down to zero if conditions warrant.
Often we see the markets anticipating events and adjusting preemptively, which they call “pricing it in”.
Historically the single biggest impact on interest rates and the FED’s decision to increase them, is inflation. Future expectations of inflation will force the fed to consider raising rates and that is possibly what we are seeing here. Many other countries, including Europe are using stimulus to drive inflation and economic growth around the globe.
Here is a link to historical inflation data going back to 1913.