For decades, real estate had been widely regarded as one of the safest investments of all in the United States. That longtime confidence proved to be dangerous to many over the course of the last recession, though, with millions of families suddenly seeing the value they had built up in their homes evaporate. In the wake of a recession fueled by an unexpected danger, the Federal Reserve took some surprising and unconventional steps to alleviate the pain. As a result, the United States, for the first time in decades, found itself with an overnight funds commercial lending rate that essentially amounted to zero.
Not long ago, the Federal Reserve finally adjusted that rate upwards, ending a years-long stretch during which some investors had even been willing to accept negative interest rates on investments they judged sufficiently safe. Moving the rate up by only a quarter of a percent, the Federal Reserve nonetheless signified a desire to move away from the fundamentally strange and unnatural-seeming interest environment that had predominated for so many years by then.
Even so, plenty of questions remain about just how committed the Fed is to restoring what most consider normalcy. The members of its Open Market Committee, the group responsible for setting the federal funds rate, have been somewhat consistent in claiming to want to move the rate even higher at upcoming meetings. At the same time, there are reasons to think that the Fed might be forced to hold back.
One of these is the possibility that even the meager rate rise that has been instituted could stamp out core inflation, making it less likely that consumers will open up their wallets to stimulate the economy further. With inflation only having barely reached levels that most investors consider acceptable, the possibility of quashing it too much and too soon is an unattractive one.
Another threat is the situation in China, where things sometimes seem to be unraveling by the day. While the United States could benefit in some respects from a weakening Chinese economy, the responses that China could take to try to salvage its growth worry many, and this will undoubtedly be a major point of concern at the upcoming fed fomc meeting.