Yesterday, at the March FOMC meeting, the U.S. Federal Reserve announced that it will hold pat on interest rates. Markets jumped at the news, though most economists and analysts had already expected the Fed to delay raising rates. While many within the Federal Reserve fear inflation and want to increase rates, Chairwoman Janet Yellen has already stated that ensuring a healthy job market is her top priority.

Any raise in interest rates could stifle economic growth.

While the lack of an interest rate hike shouldn't come as surprising news, the lack of a hike illustrates the difficult position in which Yellen finds herself. Two of the principal reasons behind the Fed's desire to raise rates boil down to the risk of high inflation, and the desire to add another tool to the Fed's now limited toolbox.

The most powerful potential tool?

Cutting interest rates is perhaps the most powerful tool the Fed has in regards to stimulating the economy.

When interest rates are cut, businesses and consumers are encouraged to borrow money. This results in increased business investment and consumer spending, both of which can help the economy expand.

With interest rates already near zero percent, however, the Fed won't be able to use a rate cut to stimulate the economy. While it might sound counter-intuitive at first, if the economy is expanding at a healthy clip, the Fed can raise interest rates slowly without destabilizing the economy.

Then, if the economy does start to slow, the Fed can use a rate cut to stimulate it. With rates so low, however, the Fed won't be able to use a rate hike to stimulate the economy, should growth slow or contract.

Low interest rates and inflation

Low interest rates and increased borrowing also encourage inflation. An increased ability to borrow puts more money into consumers' and businesses' pockets, and the more money people have, the more they are likely to spend.

Further, when interest rates are low, people are encouraged to spend rather than save. Strong, healthy spending is good for economic growth. Too much spending leads to rising prices.

When borrowing, consumers, investors, and businesses often look for investment opportunities that will appreciate in value. Stocks, business ventures, and real estate are all common investments, and low interest rates raise the risks of asset bubbles forming.

For example, it's possible that the current strong housing market is being stimulated by low interest rates. This would create a distortion, and could possibly result in a bubble forming.

Now, the Fed is finding itself at risk both of losing a valuable tool for when the next recession occurs or the economy starts to slow, and of causing asset bubbles and inflation. The solution would be to raise interest rates, and with the U.S.

economy continuing to expand and hiring remaining strong, the Fed would seem to have some leeway to hike rates.

The global economy, however, is in worse shape than domestic economy, and a rate hike at home could cause turbulence abroad. China's economy, the second largest in the world, has struggled mightily in recent months due to an apparent real estate bubble, slowing global demand, and various other challenges. Meanwhile, economic growth in both the European Union and Japan remain anemic even in spite of stimulus efforts.

These economic risks have forced the Fed to stay its hand. Yet the longer Yellen and company delay on raising rates, the higher the risks of an asset bubble forming, and the more likely that the economy will slow before the Fed is ready to react.

While a rate hike isn't in the work for this month, Yellen made it clear that the Fed is still eyeing rate hikes this year. The Fed is aware of the threats posed by artificially low interest rates and has been planning graduate increases throughout 2016. Now, investors and analysts will be looking ahead to the June FOMC meeting for a potential increase. 

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