Relax, Fed watchers. Take a deep breath. Everything is going to be just fine.
After months of anguished speculation, global investors, small businesses, politicians and economic wonks are bracing for impact as the U.S. Federal Reserve appears determined this week to raise a key short-term interest rate target for the first time since it flattened borrowing costs after the global financial system melted down in 2008.
The widespread angst and predictions of dire consequences continues to rattle the financial markets. The relevant data, however, indicates that the Fed's widely anticipated move will likely have about as much market and economic impact as the much-feared Y2K computer panic that ushered in the millennium.
But for all the doomsday scenarios rattling the financial markets, the impact of a one-quarter percent increase in the so-called fed funds rate — the interest rate banks charge each other for overnight loans — will likely cause barely a ripple in the U.S. economy.
To be sure, the economy — both in the U.S. and abroad — faces a series of headwinds from weakening growth in China to the collapse in oil prices that is hammering American oil and gas producers in energy-rich parts of the country.
But overall, the U.S. economy has returned to a steady — if slower than normal — pace of growth. Unlike some past tightening cycles — when rate hikes were designed to combat rampant inflation of the 1970s or curb the "irrational exuberance" of the late 1990s — this round of hikes follows improving conditions.
"Policymakers in the U.S. will raise interest rates because the economy is strengthening — rather than for some other more ominous reason," said Neil Shearing, and economist with Capital Economics, in a recent note to client. "Accordingly, the economic backdrop is a favorable one."
After seven years of its extraordinary effort to suppress short-term interest rates to abnormally low levels, Fed policymakers now believe most economic data show that it's time to get back to a more "normal" level of interest rates.
In 2008, when the Fed pulled out all of its monetary stops following the 2008 collapse, the move was designed to stabilize the global financial system get the U.S. economy back to a more "normal" footing. To gauge what is "normal" for the Fed, there are two basic measures — the central bank's so-called "dual mandate" — solid job growth and stable prices.
The recovery of the job market since the Great Recession offers the clearest sign that it's time to boost short-term rates from abnormally low levels. All six measures of unemployment — including the "headline" rate of 5.0 percent — have fallen to levels at or close to pre-recession levels. The pace of layoffs has fallen, and job openings are well above levels seen before the Fed began flooding the economy and financial system with cheap money to boost hiring.