US interest rates: Everything you need to know about the US Federal Reserve's decision

On Wednesday the US equivalent of the Bank of England is expected to raise interest rates for the first time since 2006.

Such a move would suggest that the US economy has returned to something like normality and has finally recovered from the deep damage inflicted by the global financial crisis.

But it would also mean huge uncertainty - no one is quite sure how the global economy will react to a change from the rock-bottom level of 0.25%.

Here's our attempt to shed some light on the matter with a look at some of the possible impacts of the Fed’s fateful decision on Wednesday evening:

If rates do rise the cost of taking out a new mortgage in the US will become more expensive.

The cost of unsecured consumer credit will also increase.

But few expect a 0.25 percentage point increase in the Federal Funds rate to 0.5% to prompt a destructive collapse in household spending.

For one thing most Americans have fixed, rather than floating, rate mortgages meaning the impact will not be immediate.

A greater fear than a return to recession is that a rate hike will slow growth unnecessarily.

“It is entirely possible that in trying to slay the inflation bogey by raising rates the Federal Reserve merely crimps economic growth” says Peter Toogood of City Financial.

The headline US unemployment rate is currently just 5%, down from a peak of 10% in 2009. But the participation rate has plummeted from 66% before the financial to around 62% today. And wage growth remains tepid.

Some economists think this implies there is still considerable slack in the labour market and that tightening monetary policy now will mean that the slack will not be rapidly used up, creating a needless waste of resources.

“The clamor for higher rates has nothing to do with the public interest” argues the Nobel economics Laureate Paul Krugman.

Another fear among economists is the “neutral” rate of interest is now lower than it was before the financial crisis for a demographic and structural economic reasons, meaning rates will not climb to their old average of around 4-5%, but may top out at at only 2-2.5%.

This means if another recession does hit the US it will be hard for the Fed to stimulate growth by cutting rates again because they will already be uncomfortably close to zero.

This asymmetry of risk, these economists argue, makes the case for only raising rates when inflation is an unequivocal and unmistakably imminent threat.

A rate hike will mean the cost of borrowing also rises for companies. Yet this is unlikely to have a direct impact on big American companies’ investment plans.

These firms are so cash rich they don’t actually need to borrow to invest. Indeed higher rates could make them more inclined to hang on to the cash because they will earn higher returns on their bloated balances.

And if the rate rise impeded aggregate consumer demand growth it could reduce their willingness to spend those surpluses in expanding their productive capacity.