Raising rates can actually be a good sign. First of all rates do not raise for just any reason out of the blue, they can’t.

Take an index such as CODI (Certificates of Deposits Index). The index is a cost of money to a bank. Add a margin and you have the fully indexed rate, as commonly known on a mortgage for example.

If the rates are going up, so are your deposits, or the money you are earning.

When looking at the chart on MarketWatch, the low on the S&P 500 was between 600 and 700 last year and now the average is around 1,100. Low rates can get the markets moving – upwards.

Obviously business is tough right now, but banks lend money on good deals, or so they should. After all, it’s our money they are lending. Therefore, when money is loaned for good projects, the borrower can make money, the lender can make money, and yes the depositors too.

The Fed raised its rate from .5% to .75%. The Fed is the banker’s bank. As rates rise, the demand is actually increasing for money, thus causing a higher price. There is no difference between money and apples. Supply and demand. However, we don’t know if the demand is from the private sector only, or government stimulated projects or a combination of both.

One thing about supply and demand, if the supply is reduced, and demand is stays constant, prices rise due to a smaller supply.

In addition to a smaller supply, the government agencies have mentioned plans to take liquidity out of the market. Taking liquidity out of the market means less money to loan. In the housing market, this could mean the government is buying less loans. Buying fewer loans mean banks won’t sell as many. With fewer sales, an increase in price can be used to offset lost revenue. An increase in price is simply a higher interest rate.

Interest rates are a funny animal and very complicated too. They can signal good times and bad.

However, the main point to consider is that with a 1/4% increase, don’t buy the hype and rush to making financial decisions.

A 1/4% is huge to financial institutions, but to the average person, such as myself, it probably won’t buy one night’s dinner each month.

Copyright secured by Digiprove © 2010 Mark