Pennsylvania Investment Observer

Interest Rates

by Daniel J. Nestlerode

The Federal Reserve, under the new leadership of Chairman Ben Bernanke, raised interest rates a quarter of one percent today. While the move was widely expected and probably would not have been any different if Alan Greenspan had not retired, the markets decided that rates were high enough before this increase.

Just before the rate increase was announced, the Dow Jones Industrials were up about 10 points, the NASDAQ was up about 10 points and the S&P 500 was up 2.5 points. By three this afternoon (March 28th, 2006) the Dow was down 102 points, the NASDAQ was down 16 points and the S&P 500 was down 9.5 points. Investors gave the Fed a uniform thumbs down on the latest interest rate increase.

The impact of this rate increase will be to bump up the rates on variable mortgages and lines of credit. My personal line of credit has moved from four percent to seven and a half percent before today's rate increase. Credit cards and other borrowing instruments will likely edge their rate a little higher. Savers will like the rate increase as the payments on money market mutual funds will probably increase and the rates banks pay savers will creep up too. So interest rate increases are not all negative as far as investors are concerned.

The biggest concern investors have is that the growth of the economy might slow as the Federal Reserve increases short-term interest rates. This is the fifteenth quarter-point rate increase in the past two years. Longer-term rates, like the two year, ten year and thirty year treasury rates have stayed relatively flat over the past two years, making the yield curve essentially flat. Continued increases in short-term rates will invert the yield curve, a condition that is generally associated with a recession in the economy and falling stock prices. This time might be different, yet I am watching stock prices very carefully and I am ready to move to cash as the market keeps on voting "no" to these interest rate hikes. To paraphrase a widely quoted commercial, "What's in your portfolio?"

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