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The End To Free Money

>> Friday, February 5, 2010

After the re-appointment of Mr Ben Bernanke, many are trying to predict the most anticipated Fed interest rate hike in history. This will spell the end of free money which is touted as the source of asset bubbles in Asia. If this is truly the case, the bubble might face bursting once interest rates increase. It is good to prepare investment positions before that happens.

The signals from history to look out for:

1. Unemployment: Once unemployment peaks, the Fed usually waits at least a year before raising rates.

2. Factory Utilization: Factory utilization needs to rebound to around 80%.

3. Wages: Wages have fell at their fastest pace in 25 years. A pronounced rebound is needed before there is extra money in consumers' hands for a rate hike.

4. Unwinding Special Facilities: After introducing nearly half a dozen "special liquidity facilities" for the financial crisis. It only makes sense to unwind them first. Four of them expired on February 1. And the program aimed at purchasing mortgage-backed securities will end in two phases - on March 31 and June 30.

5. Draining Cash: Extra liquidity will need to be taken out of the system first. So look out for newly introduced term deposits and reverse repurchase agreements and the Fed selling some of its long-term securities outright to accomplish this.

6. Policy Statement: About a month before raising rates, the Fed will remove the phrases that have been used in its statements throughout the crisis - "exceptionally low" and "extended period."


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