Hints of Fed Tightening to come

by Laura Ehrenberg-Chesler on February 11, 2010

in Credit Crisis,Economic Indicators,Investment Strategies

On 2/10, Ben Bernanke, chairman of the Federal Reserve said that he would increase the difference between the discount rate and the federal funds rate.

This is the first concrete hint that a rise in rates may be imminent.  Because of the east coast blizzard, volume on the New York stock exchange was light, so it is difficult to tell based on market action, how that interest rate comment was received.

If there is an increase in the rate the Federal Reserve pays a bank to keep money on deposit at the Fed, this might encourage banks to deposit more money, and make fewer loans, as the economy continues to improve.

This strategy may be a good way to keep the economy from over-heating, and may help contain the potential for inflation.  It could be a useful tool when the time comes.

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