Interest Rate Hike Concerns: Inflation and Interest Rate Changes

Leading the decline of the Dow Jones Industrial average approximate 200 points on June 7, 2007, short term and long - term interests rates have proceeded to climb higher. On June 7, 2007 Ten - year bond yield 5.13 percent and 30 year - bond yield closed at 6.12 percent. The concern of the bond market (Interest rate barring securities are traded at the Chicago Mercantile Exchange) directly correlates to inflationary concerns. Influencing inflation concerns, higher energy costs, reports of a strong United States economy, and concerns global interest rate increases. During first half of 2007, crude oil prices increased, affecting consumers in many aspects of daily life. Increase in oil prices affect first drivers or those that really upon transportation, increasing cost to fuel their vehicles or pay more money for transportation including higher airline ticket prices, part of the equation for inflationary concerns. Since transportation is vitally important to transport goods, commodities and food, consumers have noticed increases in grocery prices, and an increase cost for durable goods, bond market traders consider evaluating interest rate yields on bonds. Also, bond market trades consider, the United States Government reported monthly consumer price and producer price index, representing a basket cost of goods and services, which may not always reflect or under estimate the real cost of inflation for consumers and producers. During first half 2007, United States Labor Department reported monthly the unemployment rate, shown a steady number of jobs being created. (Certainly some months are reported to be stronger than other months). The increase number of jobs being created eventually places pressure upon employees to raise wages or salaries, concerns bond traders of impending inflation concerns and how that may influence an increase in prices for goods and services. Bond market traders influenced by foreign countries increasing their interest rates (Including the Shanghai government raised interest rates in May 2007, New Zealand raised key interest rate to record eight percent and European Central Bank raised its key interest rate to the highest level in nearly six years in June 2007), and many analyst predict an interest rate increase is likely in United Kingdom. The purpose of these interest rate hikes or pending rate increases, curb or slow down inflationary concerns caused by increasing prices (Prices increases as demand for goods/services increase) many countries have experienced or as many economists refer to as creating soft landing.

When interest rates increase concerns the overall real estate market by reducing the number of buyers who could afford to pay a higher interest rate borrowing money for a mortgage, refinancing a mortgage or home equity loan. In the United States, some real estate markets have seen an improvement in price or sales (According to the Commerce Department, reported new homes sales for April 2007, showed a seasonally adjusted monthly increase of 16.2% to 981,000 units, the highest in 14 years) may be jeopardized or limit their recovery by higher interest rates. However, some real estate markets were prices have soared and continue to climb higher, such as in New York City, maybe less influenced (or not effected) by higher interest rates, because of high wage earners, and fundamental economic strength of prosperity in many metropolitan cities. Also, if interest rates climb higher only for a short period of time, any decline for real estate prices, only have a temporary concern.

Most of the time higher interest rates supports a strong US currency valuation (same affect occurs for other countries that raise interest rates), contrast to other currencies traded around the world, reflecting a strong US economy. Increasing interests bold well for foreign investors, who purchase US treasuries or bonds yielding a higher return, competing against foreign interest rate yielding securities, including bonds. Unfortunately, according to history, as interest rates increases, eventually corporate profits maybe derailed or curtailed from further increases, by a reduction in consumer spending, underscoring the prospect for lower stock prices of those public traded companies.

If the United States economy shows signs of weakening (During the first quarter 2007, US economy slowed to a pace of just 0.6 percent. Reflecting the worst three -- month showing in over four years. The expectation by many economists for the first quarter of 2007 was 1.3 percent growth rate. Also, in April 2007, construction spending increased by 0.1 percent, down from a 0.6 percent gain from the previous month), concerns of interest rate increases, would be short lived or trend back down. Many economists support the theory of a soft landing, where by an over exuberant economy can be slowed down or cool off consumer spending by raising interest rates (Either by the central bank of a country increasing interest rates or open market trading of interest baring securities, contingent upon market conditions). However, the perils of increasing interest rates may slow down an economy, faster then had been expected, and may do more harm than good, including an increase in the unemployment rate. Also, increase interest rates concern is stagflation, an economy isn't growing but prices are trending higher. During the 1970s stagflation was apparent around the world as world oil prices increased dramatically, fueling inflation and causing consumers to spend less including purchases of durable goods.

The summation of factors, influence the Federal Reserve (Central Banking system of the United States. Board of Governors representing regional location of Federal Reserve Banks in major cities through the United States, and chairman decide upon monetary policy) decision making policy regarding the direction of interest rates, particularly the Federal Funds rate (Shortest term interest rate set by the Federal Reserve on loans between banks. When Federal Funds rate increases or decreases banks subsequently lower or raise their borrowing rates to consumers). Regarding the Federal Funds rate, many economists, including Zoltan Pozsar, senior economist at Economy.com commented in a report published in the USTODAY, (June 7, 2007 - 'Rate fears rein in markets' change) said: "Markets no longer see any chance of a rate cut this year." Federal Reserve Chairman Ben Bernake commented on Tuesday, June 5, 2007, regarding the US economy, foresees a rebound from its anemic start of the year, even if the housing slump persists. On June 8, 2007, Michael Moskow, president of the Chicago Federal Reserve Bank, during an interview on CNBC (Consumer News and Business Channel) regarding US economic growth said: "appropriate to hold the federal funds rate at 5.25 percent." During the next meeting of the Federal Reserve June 27 - 28 2007, the board of Governors and chairman decide if interest rate change in policy is necessary. According to history, the Federal Reserve has been very accommodating to lower interest rates if signs of economic slow down is immanent or unexpected news of turmoil events occur requiring a policy change to lower interest rates.