The big news of the week by late Tuesday was the announcement of the United States Federal Reserve Board that they were raising the Federal Funds rate 50 basis points.

We discussed basis points and the implications of changes in the Fed fund rate in the last couple of articles.

This move marks the sixth increase since last June and the first time in five years for more than a quarter point pop.

The entire global stock markets have been waiting for this announcement for several weeks; money managers and investors have been quite jittery about taking any course of action until they were able to estimate which direction the Fed and its chairman Alan Greenspan would take.

What happens during these periods of uncertainty is that the free market itself starts to build in the anticipated cost of the increase in interest rates. By the time the announcement is made the very shrewd investors have already made their moves and for them, it is a non-event.

Defensive moves What will money managers do to keep their portfolios growing at a decent rate? After talking to their financial analysts, they may sell stocks of companies that need addition capital for expansion and must go out to their favourite banker to borrow money for this growth. Stocks of companies that are cash heavy and not so subject to the interest rate changes will be purchased.

Overall, we may see a slower market where stocks will trade on their own merits, not media and investor hype.

Here's a fictitious company example: A company called AccuratePlus Golf Balls is interest-rate sensitive. With yesterday's rate hike the cost of Accurate's floating rate lines of credit will now increase, because after all, lending institutions want to continue to make a profit, so the hike is passed on. Golf balls in process of manufacture will cost more to produce, so the price differential caused by the company's higher borrowing rate is passed on to the consumer.

Golf and the free market; The person who is crazy about golfing and can only play with that brand (he/she cannot even hit the ball without them!) won't care about the higher price, up to a point! And then, even they will back off and learn to use generic golf balls. As their game falls off they will be firmly convinced that it was all due to using the wrong equipment. Who knows when perception is reality in this game? Loyal golfers will stop buying the expensive AccuratePlus brand, until Accurate responds by cutting costs and prices to get back into the sales game.

Or, interest rates will drop again and Accurate will have also discovered a more cost efficient way to manufacture, thereby keeping their personnel fully employed (and their market share).

Economics, readers, is all about the free market-juggling act.

Consumer Effect Homeowners who have fixed rate mortgages won't be as affected by the interest rate change if they have already locked in a more competitive mortgage rate in prior years. Homeowners who have variable rate mortgages that are indirectly pegged to the Fed funds rate will see their borrowing rate increase. Those that have had the foresight to plan for this contingency will have locked in their variable rate for a couple of years, by which time, interest rates may be falling again.

Consumers will see price increases, not necessarily across the board, and may continue to buy anyway, particularly things that they need, prescriptions, food, beverages, softgoods (Proctor Gamble). Cost of anything is relative according to the need and want, is it not? Mockportfolio Review Most of the fundamentally sound types of stocks are in the black, reflecting the `flight to quality' of the market itself. The one disappointment is Home Depot, which theoretically, should do very well in a consumer-price conscious market. Fix it up is not yet a necessity, but the stock is still rated a buy.

If it were not for the two examples of how high we can fly and how far we can fall, PUMA and Rambus, this portfolio would show around a 13 percent return for three months. But this is pretend world, and there are no magic wands.

Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or any other investments. Readers needing specific assistance should seek professional advice from their financial advisor. Martha Myron CPA CA is a Bermudian, holds a Series 7 NASD license and is a United States federally authorised tax practitioner. She is Programming Chair for the International Association for Financial Planning/Bermuda.

Questions regarding this article may be sent to her at 234-0290 or Email: marthamyron y northrock.bm