Will the Feds Raise Interest Rates?

CARLSBAD, CA - Investors and analysts alike are starting to get a little nervous.

The Federal Reserve is preparing to meet on June 29-30 to discuss whether interest rates should be increased.

Recent economic indicators released by the government are sending mixed signals to the market, which could be driven down if interest rates rise. For instance, inflation appears to be on the rise. While a tough number to actually gauge, inflation has traditionally been a key worry of the Federal Reserve.

At the same time, housing starts in April were up 9.2%, a jump much higher than experts had predicted. Unemployment fell to 4.2% in May, indicating that the economy still has not lost any of its steam. And average hourly earnings, an important measure of inflation, also rose 0.4% in May to $13.19, following a 0.2% rise in April.

With the economy not slowing down, the markets are now starting to get jittery, especially with the Feds meeting in days.

A shift in the Fed's Board of Governors is not helping matters. On June 1, the Board of Governors' second-in-command, Dr. Alice Revlin, announced her resignation effective July. In her resignation letter to President Clinton, she also indicated that she would not sit in on the June 29-30 meeting. While analysts have noted Dr. Revlin rarely strayed from Greenspan's policies, her resignation has muddied the direction the Feds may take.

Huge Market Impact

The Feds last met back on March 30, and were inclined to raise interest rates even then. Economic indicators at that time were already showing inflation was increasing. However, the Board voted against an increase in interest rates, designed to slow down inflation, in part because they feared it would unsettle financial markets.

The NYSE, NASDAQ and other exchanges don't like it when interest rates rise. When Alan Greenspan increases rates, bonds suddenly look more attractive, especially to large institutional investors. This causes a shift in money out of the stock markets and into the bond markets. This shift then causes a sell-off, with the markets feeling a negative impact.

The very hint of a Fed move up or down has immediate effects. In fact, many investors hold off on making transactions if a key economic report (such as employment or inflation) is on the verge of release. Each and every report that is released by the government gives analysts one more tool to predict what the Fed will do next.

Learn More About Greenspan and The Federal Reserve

While the Federal Reserve only dictates U.S. monetary policy, it has a tremendous impact on world markets. A tightening or loosening of money can immediately create a ripple effect on the entire U.S. economy.

Our editors have selected several books to help you understand how the Feds work, and why their decisions are so important to your nest egg. These books also give you an inside look at Alan Greenspan, the enigmatic chairman who virtually controls economic growth. Review our editor's selections, and you'll gain a greater understanding on the inner workings of the central bank.

And to learn more about ways you can protect your portfolio (no matter what the Feds do), contact SaveWealth today!

	Investing for Retirement
	Alan Greenspan and the Federal Reserve

Plan a Trip at Expedia