Can 1/4% hurt?

Can 1/4% hurt?

Posted on 18. Feb, 2010 by scott in economic daydreaming

Today the FED announced that starting tomorrow the so-called ‘discount’ rate will be raised, effective tomorrow, from .5% to .75%.  In and of itself that doesn’t seem like much–still well below the historically low 1% benchmark that reflects extreme monetary policy (quantitative easing for the ‘pure in hear).

Yet, in reality this increase is far more.

Announced subtly by the FED’s email process (think press release)–no luncheon, no White House prepping, no hint of a change in the more formal policy of pumping the economy at the expense of restraint of the debt variety–no accompanying fanfare in other words.  Shoulda, woulda, coulda.

In reality the decision is a shot across the bow of the perpetual optimists who have been pushing a bull-market in stocks since last March.

For the first time since, oh gosh it seems like forever . . . though only about two years, a distinct change in policy is on the horizon.  The rays are there already now and the full blown light can’t be far away.

Don’t take this FED action as a simple adjustment. Reversal is more like it.  If the economy continues to grow at a rate anywhere close to that of last quarter’s 5.7%  (and while we will know that in early April–the FED knows it now) then more rates increases are coming.

They will be fast and furious too.  Have to be to give China and others who hold U.S. debt any reason to keep on buying.  So, I wasn’t surprised when in between other stories today I noticed that China had actually been net sellers of Treasury Notes in the last few months.  Ouch!

This is just a heads-up right now.  Time to consolidate profits, trim a little fat, start thinking about what higher rates might mean.  To you, me and about half of the rest of the world.

At least my savings account might earn more than .04% from now on.  Heck we’d have been better off to stuff our mattresses with the paper the FED has been printing!

The Sun is Gonna Shine Tomorrow (humm along as you sing that line).

thanks to flickr’s cosmic kitty for the photo

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2 Responses to “Can 1/4% hurt?”

  1. Chris Lemmon

    19. Feb, 2010

    First impressions on this article are how glad I am that I just locked in my interest rate on my first home purchase at 4.875% only days prior.

    Second, and I may be wrong on this, but I see this small increase as a good thing for unemployment. One of the reasons unemployment sits where its at is because welfare is too easy to get and is just enough to pay the credit card bills. But with interest rates going higher the welfare check won’t be enough.

    This in turn will force people back to employment. Which will shrink the availability of unskilled jobs. Which will force people back to school. Which will create higher paying jobs. Which will increase the GDP. Which will give Obama an excuse to spend more money (off topic but true). And who knows, we might even help pay off part of the debt which will increase our credit as a nation and will increase confidence of other nations in investing in the US again.

    So even though it I don’t think increasing the rate will make life easier for the here and now, I do agree with the change. If my theory is right, I would advocate a higher increase, maybe by a full 1-2% (again I reiterate that I just locked in my mortgage rate:).

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  2. Joseph De Luca

    19. Feb, 2010

    This change is just a small push for the government to see if any change can result out of it. In other words, they are taking half a baby step to not fully fall face flat on the economy. I don’t think it is enough but it’s better than sitting around and pointing fingers at each other. I feel they need to look for alternatives to tax on, like daily consumer items. For example a 10 cent tax on milk would be a simple fix only if the revenue was spent correctly by the government. Perhaps the government has the “slow and steady wins the race” attitude to fix the economy. It’s a safe approach, but time isn’t on the government’s side right now.

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