The next potential issue for the fragile U.S. economy might be just around the corner. The Federal Reserve is set to hold its next policy meeting in mid-September, and there is a strong likelihood that the Fed may finally start to raise interest rates. Rates have remained at historic lows since the end of the recession in 2009, but economists say the Fed may need to bring interest rates back up to stem off inflation as the economy recovers. "We'll see increases in short-term rates over the course of the next year, and we'll see slight increases in long-term interest rates, but nothing that's going to have a huge impact negatively on the consumer," says Jill Foote, senior lecturer in finance at Rice University's Jones School of Business.
While higher long-term interest rates will mean higher costs for car and house loans, Foote says the increases will be so small and gradual that they likely won't have any sudden impact on the economy. She predicts rates on car loans or mortgages will increase by less than one percent on average, which would still leave the average rates well below where they were before the recession. She also doesn't think it will lead to a drop in the stock market. "I think the market has already priced in the fact that interest rates are going to be going up," says Foote.
Overall, the Fed's gradual increase of interest rates, combined with the gradual tapering down of its bond-buying stimulus program, which is set to end this fall, is meant to take the "training wheels" off the economy, according to Foote. "A steady, slow, slight increase in interest rates is actually a good piece of news for the marketplace," she says. "Because it indicates the Fed believes now that the U.S. economy can support the market on its own." So far, the Fed hasn't said anything about interest rates, but everyone will be watching that September meeting.