The Federal Reserve has not yet followed through on its desire to normalize the interest-rate environment, but it is edging closer.  The short-term rates that it controls remain near zero, where they have been since the end of 2008. The central bank did stop adding to its balance sheet in late-2014. That development gave rise to speculation that an interest-rate hike might finally materialize by mid-2015. But another deep freeze this past winter,  plus rising concerns about the effect of Greece’s woes and China’s slowing growth on our economy, have so far stayed the Fed’s hand. More recently, China’s currency devaluations have thrown a wrench in the works.

To free their hands and give investors a “heads-up” as to the possibility of a change in course, monetary policy makers earlier this year deleted in their closely watched statements wording to the effect that “a considerable time” might elapse before it hikes rates. That means a move higher is on the table any time the Federal Open Market Committee meets. There are a trio of two-day FOMC meetings left in 2015. The first one begins on September 16th, the second on October 27th, and the last confab starts on December 15th. There is no press conference scheduled for after the October meeting, though, making it a less likely choice for the first rate hike in nine years.

For a time, it seemed nearly a done deal that the Fed would hike rates in September. Solid job growth, a falling unemployment rate, and continued moderate growth in the economy created a solid backdrop against which monetary policy might finally be normalized. Presumably, the clincher would be more robust wage growth than has been experienced in the past few years. On that count, there are hints that more raises for workers may be forthcoming, but there is no hard and fast trend to latch on to.

Oftentimes, wage growth is linked to inflation, and it is no coincidence that the Fed has been looking for inflation to be a bit more substantial than it has been of late. But part of the reason inflation has remained subdued is China’s increasing role as the world’s factory, in what is still a relatively low-wage nation.

Clearly, the Federal Reserve has a difficult choice ahead of it. Rate hikes are usually made to cool off an overheating economy, and that is not the case yet. But the central bank may well be leaning towards raising rates slightly, in order to give itself more leeway when the next economic downturn comes around, as it inevitably will. Until now, the Fed has had the luxury of waiting, in that it was still early to midway through the business cycle and reported inflation has been low. But the domestic expansion is now in its seventh year and, although it could potentially go on for a few more years, the next batch of economic difficulties—from wherever they arise—is nearer than it was.

True, central bankers could resort to buying assets again to boost the economy, if the need were to arise. But its balance sheet remains bloated from the last round of expansionary policy. As such, buying more assets, or quantitative easing, is probably not be the Fed’s first choice to prime the pump. Lowering interest rates is likely the best option to help the economy, but the Fed first has to raise rates somewhat in order to lower them later. That may make for a momentous occasion at the September FOMC meeting, if monetary policy does finally move in a different direction.

For investors, the thinking continues to be that banks and insurance companies will do better in a higher-rate environment, as wider spread benefit interest-rate margins and bond coupons rise. Some of the big name stocks seen as benefiting from this trend include JPMorgan Chase (JPM - Free JPMorgan Chase Stock Report), PNC Financial (PNC), and MetLife (MET). 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.