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Concerns About Interest Rates Increase

[Jun 30, 2007.]

 

There's mounting evidence that investors are increasingly concerned about a possible rise in interest rates. And that did not bode well for the stock market as June made its debut.

During the first week of June, stocks took a tumble amidst worries that interest rates and inflation will spiral upward. For instance, labor unit costs jumped 1.8 percent, a clear indication that inflation is a pending threat. Productivity also declined in the first quarter, according to statistics obtained from the U.S. Labor Department. As a result, the Federal Reserve may opt to raise interest rates this year. Analysts had expected the Fed to lower interest rates in the next six months—but that expectation has waned as new economic statistics indicated possible financial hardship for Americans in the months ahead.

Interestingly enough, Fed Chairman Ben Bernanke has indicated in recent weeks that the economy is on the rebound. That vote of confidence could have an impact on shareholders in the coming months. However, it's obvious that, from the viewpoint of investors, much uncertainty remains.

On the plus side, analysts say they are seeing an increase in global growth, impressive corporate profitability, and a great deal of merger activity. In certain sectors of the economy, business appears to be booming, despite some storm clouds on the financial horizon.

Even Fed officials seem to be divided in their view of what will happen next as far as the economy is concerned. Richmond Fed President Jeffrey Lacker, for example, has been quoted as saying that he remains concerned about inflation but that the economy appears ready for increased growth. Yet, Kansas City Fed President Thomas Hoenig has said that the economy is likely to slow down before year's end.

Who's right? It may take several more weeks' worth of information about leading economic indicators before investors and analysts have a firm grasp of the economic situation.

Julie Ann Amos
June 30th 2007

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  • Mortgage Rates on the Rise
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  • Inflation Still a Concern
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