Question

What would we see happen to the bond price and interest rates now, if people expected that the FED was going to raise the interest rate in the near future? Also, why would that be the case?

Answer 1

When new bonds are issued, they typically carry coupon rates at or close to the prevailing market interest rate. The interest rates and bond prices have an inverse relationship, so when one goes up, the other goes down. If the market interest rate rise, then the price of the bond with the 2% coupon rate will fall more than that of the bond with the 4% coupon rate.  

In 1997, the Congress gave the Federal Reserve two main tasks: Keep the prices of things Americans buy stable and create labor market conditions that provide jobs for all the people who want them.

The FED has developed a toolkit to achieve these goals of inflation and maximum employment, But interest rate changes make the most headlines, perhaps because they have a swift effect on how much we pay for credit cards and other short term loans. The FED adjusts interest rates to spur all sorts of other changes in the economy. If it wants to encourage consumers to borrow so spending can be increase, which should help the economy, it cuts rates and makes borrowing cheap. To do the opposite and cool the economy, it raises rates so than an extra credit card seems less and less desirable.

FED often adjusts rates in response to inflation. Th FED's preferred measure of inflation last touched its 2% target in 2012. So the FED"S can't exactly argue that its rising rates to fight inflation, although it expects prices to rise.

FED basically adjusts interest rates that bank charge to borrow from one another, a cost that is passed on to consumers. The FED raises rates in a strong economy to keep excesses in check, and cuts borrowing costs when the economy needs support.