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19 <br /> An Attitude Shift <br /> For most of 2016 there was continuing concern over a slowly improving economy on the <br /> verge of stagnation. Then everything changed after the November election. As already noted, <br /> the stock market soared. The Federal Reserve raised their key short-term interest rate by 0.25 <br /> percentage points, and other short-term rates were poised to follow. Long-term interest rates, <br /> which are based on broader factors than just Federal Reserve policy,jumped almost a full <br /> percentage point. Even expectations for future inflation rose. Most analysts interpreted these <br /> moves as resulting from a new optimism about the future economy. <br /> So what happened to warrant such optimism? The answer is the stock market is looking <br /> forward and anticipating changes in national public policy under the new Trump Administration <br /> that will improve economic growth and business earnings. Specifically, the business world <br /> expects substantial tax reductions, major investments in public infrastructure, an overhaul of key <br /> financial, energy, and environmental regulations, and a strong pro-business attitude from the new <br /> president that will significantly increase domestic production, sales, and incomes from the trend <br /> set since the end of the Great Recession. <br /> This anticipated additional spending and economic activity is also expected to increase <br /> both public and private borrowing, which in turn led to the rise in interest rates at the end of <br /> 2016. Also, the increase in interest rates in the private market could cause some of the $2 <br /> trillion in excess reserves banks have parked at the Federal Reserve to be withdrawn and <br /> invested in the economy. Higher interest rates will also motivate holders of money to spend that <br /> money faster. Both of these changes could lead to higher inflation rates, which the financial <br /> markets already anticipate. <br /> 4 <br />