Friday, April 9, 2010, AM | 2 Comments
More and more economists are optimistic that economy is on the up swing. However, they caution that it is in the initial stages showing signs of some improvement. The logical thinking is that economy is expanding and because of that Federal Reserve might raise its ultra-low policy interest rate – currently 0%-0.25% – by the end of 2010.
To get familiarized with various interest rates if you are not already, read my post entitled “Interest is the backbone of modern economy.”
The upward movement in interest rates, in turn, increases the cost of borrowing for both corporations and consumers. The Feds, if they do increase the rate, will do so lightly because the economy, even by the end of the year, will not have achieved the up swing completely. A big reason for that is the unemployment rate which is slowly and gradually coming down but not as much as the experts had expected. It seems that unemployment rate will still be around 8.5% if not more by the end of the year.
The market recovery has many stages
The early stage of the recovery, the economists tell us, begins when somehow we see two phenomena happening: 1) the beginning of the last stage of recession and 2) the Fed has already lowered interest rates.
It seems that the bull market is almost a year old. This is considered the early stage. Some economists agree that because of the duration and other signs of the recovery in the market, the early stage is over.
That means we are beginning to enter, with fingers crossed, the second stage of the recovery which some suspect will be longer than one year.
If the economy keeps on chugging upward, the market cycle will enter the next stage and that is characterized by full economic expansion and rising interest rates. Again, the experts tell us, that the timing for the final stage is never clearly defined. However, historically when the market advances further, the Fed makes a shift in its policy toward tightening the money supply. In other words, it will raise interest rate.
In a Nutshell
The up swing in the economy will be meaningful and fruitful when the unemployed are gainfully employed and they start spending on the basic necessities of life. I guess that ought to be a prerequisite of the full economic expansion.
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