3/29/2006

New fed chief to increase interest rates

Ben Bernanke the federal chief who replaced Alan Greenspan is preparing for his first chance to alter interest rates. He is suspected to follow what Greenspan has been doing since late June 2004, increasing interest rates. The article states that commercial banks may increase their prime lending rate to 7.75 percent. This would be the highest rate in almost five years. Increasing the interest rate will affect the new gradauting class of 2006. Housing loans will increase which will make it more difficult for first time buyers to be approved for a loan. Credit card interest rates will also be increased causing Americans to have even more debt.

2 comments:

Blake said...

While it is true that the ability to acquire a loan for large ticket items such as an automoile, or home may be more difficult for some, an increase an interest rates can also offer an incentive for more individuals to save, and avoid debt. Savings rates have been incredibly low, and on the same side, purchasing on credit was easier because of the lower rates. Perhaps more people would have the desire to save, and hold off on excesive spending. In the long run, as people have acquired more savings, they will likely spend in various forms up the road, helping to promote healthy, and sustainable growth.

Dr. Tufte said...

-1 on Will's post - Bernanke has been appointed President of the Board of Governors of the Federal Reserve System, not "federal chief". Also, the Fed. does not control the prime rate.

Believe it or not, rising interest rates are often a good sign (or at least a sign that the economy is doing well currently).

The way to think about interest rates is that if you take out a loan to pay back with outflows from your wallet at x%, it shouldn't be a problem if money is coming in at a rate higher than x%. So, a high (nominal) interest rate is one that exceeds the nominal rate of GDP growth. Recent nominal GDP growth rates have been about 7-8%, which means that interest rates are not that high.