FOMC meeting decision has major impact on college studentsBy Ben Jackson | 09/16/2015 9:16am
Today is important. And I don’t mean that in some sort of motivational, “be positive” kind of way. I mean that September 14, 2015, is uniquely important, because it begins the two-day Federal Open Market Committee meeting, where America’s top economists will be meeting to discuss the federal funds rate—how much it costs to borrow money. And the outcome could be very important for college students.
The meeting itself is routine—the FOMC has eight such meetings every year, where the Federal Reserve discusses and makes decisions regarding monetary policy.
But this one is special. Why? The Federal Reserve hasn’t raised interest rates for 9 years—the last hike was in July 2006. In fact, since then, the Fed has cut interest rates substantially. At today’s meeting, they will consider raising rates, which could change everything from how likely you are to study abroad to how much your first house will cost.
But before we delve into your future finances, some background on how this all works.
Traditionally, FOMC meetings and the federal funds rate are used to guide the economy by nudging it in the right direction. When the economy is growing too quickly, inflation gets out of control, and the Federal Reserve intervenes by raising the federal funds rate—the rate at which banks can borrow overnight from one another. This effectively makes the cost of borrowing more expensive, meaning money flows less freely, and prices come down. It’s the equivalent of turning down the heat on a gas stove.
When the economy slows down, the Federal Reserve make money available by lowering the federal funds rate. Cheaper borrowing costs encourage banks to lend, starting businesses and growing the economy. In our stove analogy, this is the equivalent of providing more fuel to the fire.
So when the world came to a screeching halt in 2007 and 2008, the Fed slashed rates all the way down to a target level near zero, where they’ve been now for six years.
And that’s been pretty good for us college students, overall. Our cars have been cheaper, we’ve been more likely to get work experience (than we would have been in a similar economy under higher rates), housing has been cheap, and perhaps most spectacularly—interest on student debt has stayed (relatively) low.
By now you can see where this “Good News is… Bad news is…” thing is heading. Low rates are good for college students—we need cheap housing, affordable debt, and improved chances at jobs. But for the rest of the adult population, low interest rates mean no incentive to save. For seniors living on fixed incomes, low interest rates mean less discretionary spending (if inflation is at 2%, and your rate of return is 1%, you’re losing 1% of your money every year).
So now that I have your attention, you may be wondering what the good news is for college students. Maybe the best news is that it might not happen yet—economists everywhere are split on what exactly will happen. All the more reason to watch.
But if rates go up, don’t sweat too much. There’s a silver lining to this seemingly expensive storm cloud.
You may see your dollar get “stronger.” As rates in the U.S. increase, people around the world would prefer to hold U.S. assets rather than foreign assets. To buy those assets, they’ll need US dollars, thus driving up their value relative to other currencies.
A stronger dollar means cheaper abroad travel, making that once-in-a-lifetime trip to Spain closer to a twice-in-a-lifetime trip. In addition, foreign goods sold in the U.S. will also be cheaper.
A stronger dollar also helps keep gasoline prices low (though there are many other factors in this), which is good for students (although that can be bad for the economy, as I’ll discuss in a future column).
All of this to say: what happens in today and tomorrow’s FOMC meeting will have a tangible effect on your life going forward. What the Fed has to say about federal funds may even raise your rate of interest.
Ben Jackson is a sophomore majoring in accounting and finance. His column runs biweekly on Wednesdays.