If you follow the financial press at all, undoubtedly you have seen or read that the Federal Reserve (Fed), headed by Janet Yellen, is pondering a historic decision. The Fed Funds Target Rate, the benchmark interest rate that is set by the Fed and influences everything from interbank lending to your savings account rate, has been effectively 0.00% since the beginning of 2009. This is unprecedented in the history of the American financial system, as the rate has historically averaged 3.50%-4.50%.

The decision at hand for Yellen and the Fed is, should the Fed start to increase the rate, and how fast? To make this decision, the Fed looks at two basic tenets: unemployment and inflation rate. To many financial analysts, raising the rate is long overdue. The economy is recovering, unemployment is falling, and inflation is right around the corner. They believe a zero interest rate cannot be good in the long term. To others, the unemployment rate is inaccurate due to the many underemployed, and inflation is nowhere to be seen. They don’t think the Fed should tap the brakes now.  

So why should you care what the Federal Reserve does? The Fed’s decisions in this area will have far reaching implications. Everything from your deposit rates to overnight lending rates are fundamentally based on this rate. Nevertheless, what many overlook is that this is a short-term rate indicator. Many incorrectly believe that if the Fed raises rates, the cost of long-term home loans or ag land loans will rise as well. It’s important to understand that this may not be the case.

The last time Fed Funds rates rose, long-term rates, which are determined by inflation expectations, actually fell. Further, should the Fed raise rates too early, it would hamper economic growth in the US, and we would feel this at home with employers less likely to make new hires or provide pay increases. If they wait too long, it may spark inflation, and you could see household costs rise faster than wages.

It’s very likely the Fed’s decision will impact you, whether it increases your savings account interest, changes your loan interest rate, impacts your ability to make money, or the cost of the things you buy. It’s profoundly important they get this decision right. 

On September 17th, the Fed met for their September meeting. They looked at all of the economic data, both global and domestic. They considered the stock market’s recent turmoil and what’s happening in China. They looked at unemployment, inflation, and anything else that might affect their mandates of employment and inflation. The decision at this meeting was to not change the rate. The Fed members felt that the global economy just wasn’t strong enough to warrant it at this time. However, three-quarters of the members still feel that the first rate increase will come in 2015, with two meetings remaining before the end of the year.

No one really knows when rates will rise or how fast the Fed will raise them. ‘Experts’ have been predicting an eminent rise in rates since 2009, so I’m more than a little skeptical. However, if I had to guess, it seems that the Fed has backed itself into a corner and will have to raise the rate slightly in 2015, if for nothing else than to save face. After that, it’s anyone’s guess, but a slow increase in the coming years certainly looks reasonable to me.

Aaron Schardt

Aaron Schardt is a Senior Vice President and the Chief Financial Officer for Heartland Bank. He has been with the bank for 11 years. Before Heartland Bank, he worked at the investment firm of Kirkpatrick Pettis in Omaha. Aaron and his wife have three children and live in Hastings NE. In addition to banking, Aaron manages family investments in agriculture, real estate, and public and private business. Away from the bank, Aaron is an avid pilot that enjoys almost anything to do with aviation.

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