Strengthening US Economy Will Likely Lead to September Rate Hike

News on the US economy has been all over the map. A lower than expected expansion during the winter months earlier this year caused many to decry recovery efforts and proclaim the US economy in a second recession. Yet other analysts more optimistically pointed to sectors that did expand and indicators that showed future improvement in those that lagged. This tennis match of expert opinions has left many investors uncertain what the future will hold for the US economy or how to analyze its recent performance.

News on the US economy has been all over the map. A lower than expected expansion during the winter months earlier this year caused many to decry recovery efforts and proclaim the US economy in a second recession. Yet other analysts more optimistically pointed to sectors that did expand and indicators that showed future improvement in those that lagged. This tennis match of expert opinions has left many investors uncertain what the future will hold for the US economy or how to analyze its recent performance.

However, the debate may soon end as a final authority, of sorts, has signaled that it may increase rates later this year. The US Federal Reserve (Fed) should increase rates to fight inflation, but only if the US economy shows sufficient growth that such an increase would not do more harm than good. As economists look to the next Fed meeting in September, more and more seem to be of the opinion that a rate hike on short-term rates is imminent.

Should the Fed follow through on these predictions, then other rates, like those for mortgages, auto loans, and business financing, could climb higher, as well. However, this could cause a small slow down on stock and bond trading.

Over the last few weeks, the job market, home sales, and retail spending have improved. These gains have caused many of the naysayers to reverse their position on the health of the US economy, and to join the consensus that a longer and bitterer cold spell than normal caused the winter slowdown. Many expect the Fed to release a statement on Wednesday outlining policy changes and providing an update to its economic forecast. A positive prediction by the Fed will almost undoubtedly signal higher rates for September.

Many in the financial sector believe the Fed wants to prepare American investors for the rate hike. That would explain the less than subtle hinting it has done for much of the year. However, the hike expects to be very gradual, matching the slow recovery of the US economy following the recession of 2008. The Fed does not want to spook investors, foreign or domestic, who may already be skittish given the shaky state of the Greek economy. While a rate hike could have some chilling effects, it could also serve as a reassurance to the market that the Fed believes the US economy is sturdy enough to withstand slightly higher rates.