The Economist explains: The Fed's plan to hike interest rates

by / Monday, 31 August 2015 / Published in Economy

ALL across America there are nine-year-olds filing into fourth-grade classrooms who have yet to enjoy the thrill of a Federal-Reserve rate increase. The Fed, America's central bank, last raised rates in June of 2006, by 25 basis points to 5.25%. It soon found itself reversing course, as a housing bust gave way to the Great Recession; since December of 2008, the Fed's benchmark interest rate has been set at between 0.0% and 0.25%. Yet that may be about to change. A speech delivered on August 29th by Stanley Fischer (pictured), the vice-chairman of the Federal Reserve, gave no indication that the Fed had been deterred by recent market wobbles from its plan to raise rates this year, and perhaps at the next meeting, on September 16-17th. Why is the Fed about to raise interest rates?The Federal Reserve is charged with setting monetary policy in order to meet Congressionally set mandates for "maximum employment" and "stable prices". The Fed has long determined that the best way to meet those mandates is to target a rate of inflation of around 2%; in 2011 it officially adopted a 2% annual increase in the price index for personal consumption expenditures (often called PCE inflation) as the target. Fed officials reckon that when the economy is weak, inflation will fall, while when the economy is close to maximum employment, rising wages will push up inflation. Keeping inflation …
Source: The Economy