You may not care about this, but it really does affect you deeply. More than you know. The Federal Reserve’s actions have ramifications across the board and it even affects you if you live and/or travel abroad.

Let me explain.

The Associated Press wrote a nice article about the current events as it relates to rates. Of course, there’s a lot more to discuss because the ripple effects of rate changes or lack thereof affect the stock market in the near term and the economy in the short to long term.

It’s a well-versed rule of thumb that the stock market tends to be a pretty good prognosticator of where the economy is going to be in 6 to 9 months. We were lucky enough to see a favorable reaction from the stock market today, indicating that traders feel the economy will have a “soft” landing and that we won’t fall into a severe or prolonged recession. Let’s face it, you can take comfort that the fed’s hands are really tied behind their back.

Why?

Very simple. The housing market is entering a prolonged slump and, right now, the shock of increased rates would do a few things:

1. It would lower inflation: This would be great from an inflation targeting perspective. However, inflation would only slow because the economy would slow. Not good.

2. It would increase short term mortgage rates: Even though increased fed fund rates over the last several years have not materially increased the 30 year bond, an additional increase in rates at this point in time would still affect the short term bond market in a material manner. Traders would feel the unease, knowing that the economy would collapse because of increase interest payments on adjustible rate mortgages, additional widespread foreclosures, and the like.

3. The trade deficit would move in the wrong direction: An increase in interest rates would make the dollar more competitive with foreign currencies. This would cause a movement to the dollar, increasing its relative value. The value of imports would increase as American consumers would find foreign goods cheaper, and the value of exports would decrease as foreigners find American exports to be more expensive.

Add it all up, and the Fed is staying put for now. However, as we get into a deeper housing funk and the economy continues to slow, I expect the Fed to lower interest rates. We’ll see.