The interest rates set by the Federal Reserve Bank have been pegged near zero for many years now, and investors are signalling that they are ready to see it go up.
During the financial crisis, interest rates were slashed down to historic low levels as the Fed did everything in its power to ease lending and help spur the economy back into recovery. Beyond cutting interest rates, the Fed embarked on other programs, such as bond-buying, to try to inject more cash into the economy. However, as markets improved, it has been trying to find a way to start backing out of its “emergency” position.
The bond-buying program of “Quantitative Easing” ended several months ago, but they still have not been able to raise interest rates back to “normal” levels. One major reason is that there has not been enough inflationary pressure to justify it, but another major concern is that the shock of raising interest rates could hurt growth as money becomes more expensive to borrow.
However, the bonds market, the leading indicator as to how the market as a whole will react to changes in interest rates, is holding steady ahead of next week’s meeting, where most analysts expect the rates to finally start to rise. Bond investors are the most sensitive to interest rate changes; as the interest rates on government bonds change, the yields bond investors rely on are impacted directly. Stable bond markets ahead of potential interest rate increases sends a strong signal that the markets are ready for what the Fed throws at them.
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