The following article was supplied by Joe Birkinbine of ATP Financial Services in Steamboat Springs:   We’ve become accustomed to low consumer interest rates, and many people may be conditioned to see higher rates as something to fear. But it’s difficult to see much of a downside to the Fed’s move. The interest rate in question, the discount rate, is what the Fed charges banks for emergency loans. It’s not directly related to the interest charged on consumer loans, so the rates you pay for credit cards, auto loans, and adjustable mortgages aren’t likely to be affected. In announcing in February 2010 that it would raise the discount rate 25 basis points to 0.75%, the Fed also made it clear that it would not soon raise the federal funds rate, which has a tremendous influence over interest rates paid by consumers. When the Fed adjusts interest rates, the earliest and most visible effects tend to be psychological. By raising the discount rate, largely a symbolic gesture, the Fed managed to send a message without potentially dampening the prospects of economic recovery, some analysts say. Higher interest rates are indeed a concern for consumers, but they are also a good sign for the economy  Signs of RecoveryIn 2007, the Fed began lowering the discount rate from a high of 6% to address problems in the credit markets that began to surface that year. Fear had gripped the credit markets, and lenders were reluctant to make loans. The Federal Reserve, working with other central banks, undertook several extraordinary measures designed to restore confidence. One of the measures was to lower the discount rate to assure lenders that they would continue to have access to marketable funds if other sources dried up.  Raising the discount rate is the Fed’s first step toward removing some of the nearly $1 trillion in emergency stimulus that it pumped into the financial system. It is an indication that the Fed is confident lending conditions are stable enough that extraordinary measures are no longer necessary.  Heading Off InflationOne of the common criticisms of the Fed’s trillion-dollar emergency intervention was that flooding the financial system with so much money was eventually going to spark inflation. Although this is a valid criticism, inflation is likely to remain low until the nation’s employment situation begins to improve. Indeed, weak employment, tepid consumer spending, and other challenges facing the economy are among the reasons why the Fed hasn’t yet moved to raise the federal funds rate. Nevertheless, the Fed faces a tricky task in removing its emergency stimulus from the system soon enough to avoid inflation but not so quickly as to stifle the recovery or frighten the financial markets, which closely watch the Fed for signs of confidence or fear. By raising the discount rate now, the Fed is helping to reduce the risk of future high inflation, which is good news for investors and consumers.   Rates Will Eventually RiseThe Fed has signaled that it is likely to increase the federal funds rate as soon as economic conditions allow, which will likely cause consumer interest rates to increase. Most analysts don’t expect this to happen until late 2010 or sometime in 2011.    What will that mean for your finances? Higher interest rates are generally a sign that economic activity is picking up, so although you may no longer be able to buy a car with zero interest, there are other benefits to living in a growing economy. Please call if you have questions about how to prepare for higher interest rates. 

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