The Good & the Bad about the Fed’s Latest Rate Move
Posted on | February 21, 2010 | No Comments
Anytime interest rates move up most people view this is a signal of the economy getting worse. However, when rates are this low, it’s really a signal the economy is getting better and can withstand higher interest rates. To better understand it, you have to think from an investor perspective. Making 4 to 5 % on any given investment is not a very good long term investment while making 7 to 9 % is a good long term investment. So once rates reach those levels, more investors participate, which means more money is available for lending.
Because of the unexpected move last week by the Fed, (they bumped up the Fed Discount Rate ¼% which is the rate they charge member banks to borrow) the signal is one of confidence that the banking crisis may be close to over. This encourages banks to borrow from one another instead of the Fed. It also signals to the market that the Fed is okay with rates inching up a bit to head off any inflation the recovery may be generating.
Even though it may mean slightly higher rates, it should be viewed as a good conservative move on the part of the Fed to avoid having to hike rates drastically later. This means things are looking up. While waiting to purchase a house will mean missing the lowest prices and interest rates that will be available this year, it is a good thing that the overall economy is starting to show definite signs of recovery. If the time is right for you to buy, now is still the time.
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