Many have wondered why interest rates have risen so sharply this year without the economy showing significant enough strength to heat up inflationary pressures. Yes, the threat of the Federal Reserve decreasing stimulus by lowering their purchases of Treasuries and Mortgage Backed Securities hovers over the markets. Yet, the Fed would not be considering lessening stimulus if they were not more confident about the economy.
One must remember that these extraordinary measures were put in place to keep us out of a second recession as the world-wide economy was slowing while we were struggling to come back from our deep recession. How many times did we hear that Europe’s recession and fiscal crisis could drag us back into recession?
In the past we asked the question — will Europe pull us back into recession or will we lead Europe out of recession? We surmised that if the real estate markets in the U.S. continued their recovery, then it was more likely that we would help lift Europe up. While we can’t say there was a direct relationship, the news released recently that the Eurozone had a positive quarter of growth bodes well for this scenario as well. A 0.3% growth rate for the 17-nation area is nothing to write home about, but it is progress.
One should remember that the central banks in Europe have been applying their own brand of low interest rate stimulus. The fact is that Europe is not out of the woods and we are a long way from a normal recovery. However, the easing of Europe’s recession weakens another threat to our economy.
The Fed’s reaction to lessen stimulus is a normal reaction to the lessening of threats. We are still a long way from ending all stimulus activity from the Fed but we seem to be on the doorstep of the first move.
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