Are higher interest rates coming sooner rather than later?

Odds are rising that the Federal Reserve, this nation's central bank, could decide to push its key interest rate up later this year in an effort to address rising inflationary pressures. Such a move would follow recent interest rate increases by various central banks around the globe, while others have remained silent.

Such a move, or more likely a series of moves, can't come fast enough for millions of retirees or for those close to retirement.

Background

The Great Recession, and the painful near-financial market meltdown of 2007-2008, led the Federal Reserve to reduce its most important interest rate — the federal funds rate — to an all-time low target range of 0.00 percent-0.25 percent in mid-December 2008. Other central banks around the globe largely followed suit.

In addition, the Fed has been throwing mud (money) at the wall for the past three years, hoping to see what would stick in terms of monetary efforts to help stabilize domestic and global financial markets, while providing enormous liquidity (money) to calm widespread fears. The initial program, now referred to as QE1 (quantitative easing), provided $1.7 trillion in purchases of U.S. Treasury notes and bonds, mortgage-backed securities and debt issued by U.S. government agencies.

The second program, QE2, began late last year and is set to conclude its purchase of $600 billion of similar securities by June 2011. Some suggest that this program could be ended earlier. Most financial market players do not want to see implementation of a possible QE3, as it would likely stoke inflation fears even further.

Rising inflation

Even as the Fed has been providing unprecedented amounts of monetary stimulus to the economy, world events have led inflation pressures higher. Political turmoil in the Middle East and in Northern Africa, combined with fears of similar unrest focused on Saudi Arabia, has led oil prices higher.

Industrial commodities and food prices, tied to solid global economic growth (can you say China?) and some stockpiling (can you say China again?) have also pushed inflation and inflation expectations higher. Any disruption to Saudi oil flows could see oil prices temporarily move to record levels.

Fed statements

Various Federal Reserve officials in recent weeks have suggested that the time will soon approach wherein the Fed must address these rising inflation worries. While the Fed's primary measure of inflation is still below its desired 1.5 percent-2.0 percent annual objective, it has been rising.