The end of an era?

This Thursday, Janet Yellen will face the press and make a speech that economists expect will be of historical significance. The US Federal Reserve Chair will make an announcement concerning the Fed's interest rate. Not much else is known. And expectations over what she might say couldn't be more divided.

Why is this important?

It will become clear on Thursday whether the Federal Reserve will raise its interest rate or not. The country's banks consider it a crucial indicator for how much they will need to pay for loans from the central bank. And this, in turn, will impact interest rates they will charge for loans granted to companies and individuals. As such, the Fed's decision will affect the country's investment and consumer climate.

But the Fed's interest rate is not just of domestic significance. It also influences investors, companies and banks the world over. When the Federal Reserve changes its interest rate, it has a knock-on effect on the global economy. Accordingly, the Bank for International Settlements (BIS) dryly noted this month that "US short- and long-term interest rates significantly affect the corresponding rates in other countries."

The current situation is unique. Since 2008, the Fed has maintained a historically low interest rate of between zero and 0.25 percent. It's done so to cushion the effects of the financial crisis. It's been almost 10 years since the Fed raised its interest rate. Yet this July, the Fed's Janet Yellen told Congress that the era of cheap money might soon be coming to an end.

How soon is 'soon?'

This year, there are two opportunities to live up to in this statement: either this Thursday or in mid-December.

Leading economists are divided over whether the Federal Reserve will raise its interest rate this week or later this year. The odds are fifty-fifty, reckons Paul Ashworth from Capital Economics.

The reason for this uncertainty is both simple and complicated. Never before has there been such a protracted low-interest phase. And no one knows what will happen when the era of cheap money suddenly comes to an end. At the same time, economic developments are diverging from what economic theory would predict.

Inflation or deflation?

Central banks employ their interest rates to ensure price and currency stability. By doing so, they also hope to influence the labor market. The textbook logic is this: If the unemployment rate is high, wages and prices fall while deflation looms. In this case, central banks lower their interest rates and stimulate economic growth. If, however, the unemployment rate is low, then wages and prices rise, and inflation becomes likely. Here, an increased interest rate can stop the spiral of inflation.

But the economic reality has differed greatly from such textbook theory. Britain's weekly newspaper "Economist" observed some strange behavior in the US economy since the financial crisis. In 2009, for instance, the country's unemployment rate stood at 10 percent, yet prices were rising. And recent labor market figures suggest unemployment has shrunk to 5 percent, while inflation has gone down. With an inflation rate of just 0.3 percent, economists now fear deflation.

Should the Fed raise its interest rate now?

Accordingly, more and more observers are worried about an interest rate hike. Former US Treasury Secretary Larry Summers is one of them. In August, he told the British business daily "Financial Times" that "raising rates in the near future would be a serious error that would threaten all three of the Fed's major objectives - price stability, full employment and financial stability."

The World Bank and International Monetary Fund also share this view. Leading economists from both institutions warn that this could lead to capital being pulled out of emerging countries, thus harming their economies.

'Fear abounds'

Economist Henrik Müller predicts bleak times ahead should the Fed raise its interest rate.

"There is fear that the world could get dragged into a deflationary spiral with dropping prices, mass unemployment, bankruptcies and even social unrest," he told German weekly magazine "Der Spiegel."

Nevertheless, experts see grounds for raising the interest rate. It is one of the most effective means for responding to an economic crisis. If the rate is as low as 0 percent, then the Fed has no possibility of influencing the economy. But this could become necessary given China's economic troubles. Also, excessively cheap loans can entice investors to take great financial risks. But if these backfire, entire economies can get damaged.

By raising the interest rate, Janet Yellen and her colleagues could at least signal that the Fed believes the world's worst financial crisis in 80 years has now passed. And this would mean back to business as usual, along with raising and falling interest rates.

And what about timing?

"There is no ideal time for implementing such a hike, just like there isn't an ideal time to see the dentist," Deutsche Bank Chief Economist David Folkerts-Landau recently told the German weekly "Die Welt."

"But one shouldn't postpone either for too long, or else it may lead to painful consequences."