Rates jumped yesterday after Janet Yellen (the new Fed Chairperson) spoke. She rattled the markets by implying that the Fed may push rates up sooner than expected. She also made it clear that the Fed will continue tapering (backing off on its bond purchases).
Rates are heading up this year.
We discussed this before but higher rates can be good for the economy overall. This is over-simplified, but when rates are held artificially low, investors “chase yield” or look for adequate returns in abnormal ways. For example, investors might buy up treasury bonds or commodities instead of buying stocks or investing in new factories that create more jobs.
Also, when rates are artificially low, banks are often less likely to lend to small businesses for a variety of reasons.
As rates rise, money starts to move around the economy in healthier ways and this benefits everyone if the economy starts to grow faster.
A growing economy means more job growth, more job transfers, and more real estate demand.
Higher rates are more painful for all of us in the short run, but they are ultimately beneficial.
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