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December 08, 2009

The next step

There's something that investors and others who watch the economy are keenly interested in. They are already watching for clues for when it might happen. What is it, and when it happens, what will it mean?

"The 'it' is the raising of interest rates by the Federal Reserve. Every day, every time the Federal Reserve chairman speaks, every time the Federal Reserve board meets, observers are looking for clues in the statements by both as to when that 'it' will occur, when will the Federal Reserve increase interest rates? And most economists and others think it will happen sometime next year. Now, recently the Federal Reserve Chairman Ben Bernanke gave a speech in which he said for the foreseeable future the Federal Reserve will not raise interest rates. And actually on that day, the stock market went up very big, because you can look at this anticipated increase in interest rates really positively or negatively. On the negative side, what it would mean is higher borrowing costs, which make it harder for people to take out loans and spend money. And of course, that's just what we want to have happen. We want people being able to get loans and spend money. So if the Federal Reserve raises interest rates too rapidly that may spook the market, spook people and actually send the stock market, for example, into decline. But on the other hand, you could look at when that day happens, when the Federal Reserve raises interest rates in a positive way, because that means the Federal Reserve thinks the economy is strong enough to withstand these negatives. But it will happen. We will see higher interest rates sometime in the future. The question is, simply, when?"

Posted by Dave at December 8, 2009 08:00 AM