It’s hard to look out the economic window these days and see anything but gloomy clouds both overhead and on the horizon as far as the eye cares to see. We have a 9.7% unemployment rate and record numbers of foreclosures even after hundreds of billions of dollars in bailout and stimulus money, job creation programs by the government, and a reduction of the federal interest rate to near zero for a long time.

It would be nice to see a surprise move in the unemployment or foreclosure rate, but they are likely to trudge along. What we did see this week, though, is a surprise raising of the federal interest rate. Analysts and pundits fear that any rise in the rate will hurt whatever growth is happening, will hamper future growth, and will seriously injure any kind of rapid economic recovery. On the other hand, economists (in theory) and day-to-day Americans (in practice, as we carry around $2.5 trillion in credit card debt) realize that money isn’t free forever and at some point the interest rate will have to go up.

It started going up on Thursday when the Fed raised the discount interest rate to 0.75% (The discount rate is the rate at which banks borrow money from the Fed), a move that represents the beginning of a righting of the ship, the first power move since Bernanke’s approval for a second term, and, in the largest sense, a strengthening of the dollar. That strength is reflected in the rise of the dollar on currency markets, balanced by a drop in the price of pretty much everything else. Government and Fed officials all swarmed to assure the world that this change in the discount interest rate does not represent a change in the policy of keeping the cost of money low. Because the move happened almost a month before the central bank’s next meeting on policy, many are banking on a rise in the federal funds rate later on in 2010. I would say they are probably going to be right.

The indicators are all thumbs up for a recovery. Washington just came out with that infographic about how job loss is back to around zero, meaning they will hopefully be created again sometime soon, and unemployment is back down a bit, however little, and the banks and car companies are back on their feet. It’s time to start moving away from emergency procedures like ultra-low interest rates. It’s not a reversal, it’s a hedge toward returning to business as normal.

As Reuters quotes Robert Rennie, a strategist at Westpac in Sydney saying in the Reuters Messaging chat room: "This is a significant and likely symbolic move that will impact on market sentiment. The emergency easing cycle began with discount rate cuts - it was all about easing liquidity to banks. So the move to raise the discount rate means the long journey toward normalization has begun."

Which is reassuring, something I never thought I’d say about an economist.

The idea of a journey toward normalization is a bit strange and, I think, ultimately revealing about how we think of the world- is the economic growth of the past 30 or even 10 years normal? I heard in a talk last week that many newspapers are cutting their workforces or going out of business as they are not turning a 20% profit. Were they losing money? No. They were turning 10-12% profit. But it wasn’t good enough for expectations or what was considered normal.

Will we return to normalcy or create a new normal?

That remains to be seen.

Photo Credit: DavidDMuir (via Flickr under CCL)