Higher interest rates are coming…

That was the unmistakable message from the Federal Reserve last week when it increased the discount rate, the rate it charges banks for borrowing reserves. Although the move came sooner than many expected, it was a healthy step toward more normal conditions and a sign the banking system is healing. The Fed stressed that the move doesn’t mean any imminent rise in the more important federal-funds rate. Despite the soothing words, it’s a clear warning that near-zero interest rates won’t last forever, and that the Fed is prepared to act when necessary to raise rates.In the abstract, this can’t be a surprise. With short-term rates near zero, and even longer-term rates the lowest they’ve been in my lifetime, interest rates really couldn’t go much lower. But the question has always been one of timing. It’s not clear exactly what the Fed means when it says it won’t raise the federal-funds rate for an "extended time." Is that three months? Six? The Fed itself may not know for sure. But we now know it won’t be an indefinite period. The tightening cycle has begun.
By James. B. Stewart, Feb. 24, 2010 WSJ

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