Now or Never

I came across a piece of news regarding the possible raise of interest rate by the Federal Reserve from: http://www.businessweek.com/news/2010-02-10/bernanke-says-fed-may-opt-to-raise-discount-rate-before-long-.html.

I thought of the implications such action will have on the US economy:

Pros:

Now, at low discount rate, banks borrow lots of money, which are loaned to clients, who invested in real estate and stocks, causing an upward surge of stock in March of 2009, indicating an over-heated stock market.

By raising the discount rate, Central bank tightens the cash flow of US. This decreases the supply of cash, and increases the value of the US dollar, preventing inflation in the economy.  This will also restrict banks from borrowing from central, restricting the clients to borrow from banks. Thus, less cash will be flowing in the real estate and stock markets.

Cons:

An increase of value of the US dollar would mean that other countries will have to pay a higher price for US goods, reducing willingness to buy US exports.

By mentioning the notion of “increasing discount rates” causes fear in the stock market, reducing the investment in the stocks. From what we learned in COMM 486G and from my previous post, this makes sense as stocks predict future based on information and news.

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