Wednesday, December 15, 2010, AM | Leave Comment
Interest rates seem to be on the rise. The experts say one reason can be that investors have bombarded the bond market with their cash. They see a sign of the economy being on complete recovery path. Along with that, they seem to worry that the United States will not take steps to reduce the budget deficit anytime soon, which is way up in the stratosphere.
The reason for the sudden rise in long-term interest in the last few days can be because Congress and the White House struck a deal to extend tax cuts and unemployment insurance benefits. It works counter to the efforts of what the Federal Reserve wants to do. The Fed just recently ( in November) showed a plan to reduce rates by buying bonds, to the tune of $600 billion.
In a meeting yesterday on Tuesday, the Federal Reserve decided to continue to buy bonds and keep short-term interest rates near zero, reflecting the nation’s weak economy.
To strengthen the economy, it needs to have lower interest rate and that’s the job for the Fed. And that’s the reason it wants to buy bonds in large quantity. But if the uptick persists or it goes up further, then it would work against a stronger economy.
The benefits of stimulative efforts from both fiscal and monetary policy will almost diminish.
Both sides have created a tug of war.
The President and Congress seem to pull the rope in one direction and the Fed in another. Let’s see which side prevails. Everybody will be happy with whatever boosts the economy and lowers the unemployment rate by creating more jobs. Folks need to be employed.
The higher rates are already rippling through the mortgage industry. According to Freddie Mac, the average 30-year fixed-rate mortgage was 4.62 percent last week, up from a low of 4.17 percent the week of Nov. 11.
The fact of the matter is…
A stronger economic outlook usually causes interest rates to rise, as investors shift money into riskier investments such as the stock market and come to expect the Fed to raise rates sooner than it was expected to.
The Congressional Budget Office estimates that the plan set forth by the President and Congress, which cleared a key procedural hurdle in the Senate on Monday, would add $858 billion to the deficit over the coming two years.
In a Nutshell
We just have to wait and see if any of this has significant effect on inflation for next year. Experts agree that the average for the whole year would be just under 2%. Also, folks need to work. They need jobs.
Refresh your little gray cells. For folks who need to know more about interest rates and how the Fed control the economy with it, please read Interest Is The Backbone Of Modern Economy.Facebook.com/doable.finance