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Bernanke starting to raise interest rates
Bloomberg.com reports (Fed in Talks With Money Market Funds to Help Drain $1 Trillion) that Federal Reserve chairman Ben Bernanke is planning to sell $1 trillion worth of short term US Treasury Bonds to money market funds. The Fed would take the money it gets from selling those bonds out of the monetary base and, in effect, burn it.
There are two things that can be deduced from this story:
For the last two years (since Bush's stimulus package in February 2008), Bernanke has been, in effect, printing money in order to buy Fannie Mae, Freddie Mac, and US Treasury Bonds. He has been doing so to keep U.S. interest rates low.
Now he appears to be changing course. U.S. interest rates should start rising, and this could have the following effects upon the economy:
All of the above four effects depend upon the amount that interest rates change. If they only go up a bit, then these factors may not be much affected. Also, if long-term interest rates currently include inflationary expectations, and if Bernanke's actions reduce inflationary expectations, then long-term interest rates could actually fall.
I am sure that Bernanke is following economic indicators quite closely. He, apparently, thinks that inflation is a bigger danger right now than a double-dip recession. His action is a sign of confidence in the short-term future course of the economy.
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