Federal Reserve & Interest Rates

In early September, there were many worries that the United States was about to face a serious recession. Money was injected into the markets in August, and the federal funds rate was cut in mid September. The discount rate was also reduced for a second time in response to market trouble. The job outlook showed a loss of 4,000 jobs at the end of the summer, and the dollar reached all time lows against the Euro. For the first time in over 30 years, the Canadian dollar came head to head in value with the U.S. dollar.

Now there is new hope, at least in some areas. Word has it that our country is not in such a terrible shape as originally thought. The post-summer job data was corrected showing an 89,000 job increase. That makes a major difference in the employment outlook. There are still pockets of high unemployment rates, like in Michigan and Alaska, but overall employment in the country has kept under 5% for a long time.

The rate reduction actions made by the Federal Open Market Committee proved to be of great benefits to banks and investors in the stock market. With a few slight bumps in the road, the market began to excel in several areas. The month has looked promising so far for most markets, and fears of a steep market crash are no longer on the forefront.

The dollar is slowly but surely rebounding against the Euro. It has come from the all time high of the Euro at 1.4283 dollars down to 1.4173. The dollar is also trading strong against the yen consistently. There are still heavy concerns that the dollar is not yet strong enough, and it could pose a threat to the economy later on.

It is because of the recent poor performance of the dollar that many investors are expecting another drop in rates at the end of this month. There are two camps on this idea. One side believes that the recent rise in consumer spending and the new job outlook might postpone any rate reductions. With market performance high, there are doubts that the Fed will make any more strong moves too soon. The other camp speculates that with inflation out of control and the continued weakness of the dollar, the Fed might take interest in another rate drop. The housing market doesn’t seem to be rebounding as of yet, and there are some that feel its continued threat might motivate an additional rate cut at least by the end of this year.

Economic uncertainty looms over the heads of the Federal Reserve Board of Governors at this time. Since the moves were made in the interest of long term economic improvement, the Fed might just wait and see how the economy functions without any additional moves. With the recent positive news reducing the chances of a slip into recession, many remain skeptical about new rate reductions so soon.