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Are Interest Rates Heading Higher in 2010?

Using the Effective Federal Funds Rate as a proxy for interest rates, it is reasonable to conclude that interest rates are at historic lows and likely to only go higher. 

Effective Federal Funds Rate (1954 – 2009)

 

Source: MarketBrowser, 2010

 

 

With the understanding that interest rates will not/cannot go any lower (i.e. the Effective Federal Funds Rate now stands at close to 0%) , the question then becomes when will interest rates start to creep upward again? We, at Hennion & Walsh, do not believe that there is a high likelihood that the Federal Reserve will raise interest rates in 2010 due to their publicly stated position of continuing to prioritize the stimulation of the economy, lingering difficulties in the credit markets, and the political effect of mid-term elections along with the expected low levels of economic growth.  

However, there is a chance that the Federal Reserve may raise rates in a measured fashion by the end of the year if, in fact, their own Real GDP Growth rate forecasts (n.b. the Federal Reserve recently revised their Real GDP forecast to an annual growth rate between 2.5% – 3.3% for the new year) come to fruition and, in so doing, put economic growth over the unofficial Federal Reserve inflation target of 1.5% – 2.0%. If this does not occur, record low interest rates will continue to serve as an anchor to the strength of the U.S. dollar and present investors with intriguing overseas and alternative investment opportunities.

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