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Rising Interest Rates Could Create the Next Financial Crisis

The Federal Reserve is raising interest rates, and this shouldn’t be taken lightly. In fact, it could be the brewing ground for the next financial crisis.

First, let’s talk about the reasons for increasing the rates. You see, the Federal Reserve started to print money and dropped its benchmark interest rates to zero in order to boost the U.S. economy after the financial crisis of 2008-2009.

The intent was definitely good. Basic economics suggests that lower rates would boost the economy.

In 2015, the Fed decided that the U.S. economy was doing great, and it was time to raise rates.

Good intent this time around as well. Why? Because economic data suggested the U.S. economy was growing at decent pace and that inflation was starting to pick up. So something had to be done to control the economy from overheating.

In doing this, the Federal Reserve, with its statements, was very clear on how it would raise the rates and keep the market aligned with it. We didn’t have many unexpected moments in assets across the board. One could even say that there wasn’t much interest rate uncertainty.

Interest Rate Uncertainty Is Likely Ahead

Fast forward to now. We have an outright trade war in play between the U.S. and major economies. This could impact the U.S. economy and asset prices.

As this is happening, the U.S. economic data is making a turn for the worst and a few indicators are already suggesting that a recession could be nearing.

Despite all this, the Federal Reserve remains adamant that it will raise interest rates. According to the most recent projections from the Federal Open Market Committee (FOMC), the rates set by the Fed could be as high as 3.75%. (Source: “Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their individual assessments of projected appropriate monetary policy, June 2018,” Board of Governors of the Federal Reserve System, June 13, 2018.)