Federal Reserve May Raise Interest Rates: What That Means For You

Janet Yellen, chair of the Federal Reserve, indicated Friday at a highly anticipated speech in Jackson Hole, Wyoming, that the central bank may soon raise interest rates in light of a strengthening economy. The Fed last raised rates nine months ago, the first time it had done so since the 2008 economic downturn.

Financial observers pay close attention to the Fed's communication for hints about its future plans, but Yellen did not provide a specific date for a rate hike. The soonest such a move would likely be announced is at the next meeting of the Federal Open Market Committee in September, though most observers believe the Fed will wait until December before officially deciding to raise rates.

"I believe the case for an increase in the federal funds rate has strengthened in recent months," Yellen said.

Stanley Fischer, the vice chair of the Fed, echoed Yellen's view that the economy is doing well, especially in terms of jobs growth.

So, what does this all mean for you?

The Fed can increase the interest rates by raising the federal funds rate, which is the rate at which banks lend to each other on a short-term basis.

By raising the interest rates, the Fed would make it more expensive to borrow money and more profitable to lend money. Those with savings accounts would receive slightly larger interest payments, while people taking out mortgages or business loans would pay higher rates.

Even if the Fed does decide to push interest rates up, however, it will most likely only be by around a quarter of a percent.

Many other country's central banks are not currently planning to raise rates, due to a sluggish global economy, and many observers question the wisdom of a rate increase by the Fed. Nevertheless, Friday's speech indicates that a rate increase may indeed be coming sooner rather than later.

Story by John Carter, MNI

Photo credit: Day Donaldson via Flickr (edited)