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.

This weekend in Dallas Texas, Federal Reserve Board members, Reserve Bank members, economists, and professors met for a conference (an economic research event) on monetary policy. One of the major subjects that are being discussed is the influence of John Taylor.

“John Taylor has had an enormous impact on how we think about monetary policy and the channels through which it affects the economy. His notion of a trade-off between the variability of inflation and of output (the Taylor Curve), his approach to modeling nominal rigidities (Taylor contracts), and his characterization of how policy has been and ought to be conducted (the Taylor Rule and associated Taylor Principle) have each had an influence that has proven to be enduring and pervasive.”

John B. Taylor has been recognized around the world for years as an international monetary and financial issue expert. He has produced extensive research on international economic policy, fiscal policy, and monetary policy. He is the originator of the ‘Taylor Rule’ which is a principal that guides central banks toward macroeconomic stabilization. He served as the undersecretary of Treasury for the United States for several years, and is now the advisory board chairman of the Dallas Fed’s Globalization and Monetary Policy Institute. He also serves at the Hoover Institution and Stanford Institute for Economic Policy Research.

Federal Reserve Board Chairman Ben S. Bernanke was in videoconference at the start of the meetings on Friday. He recognized and praised Taylor’s approach to economics. “John’s influence on monetary theory and policy has been profound,” Bernanke said.

Vice Chairman of the Fed, Donald L. Kohn gave a speech on the role of simple rules in monetary policy making. He gave three benefits to Taylor’s simple policy plan. “The first benefit of looking at a simple rule like John’s is that it can provide a useful benchmark for policymakers. It relates policy setting systematically to the state of the economy in a way that, over time, will produce reasonably good outcomes on average… A second benefit of simple rules is that they help financial market participants form a baseline for expectations regarding the future course of monetary policy … A third benefit is that simple rules can be helpful in the central bank’s communication with the general public.” Kohn also discussed the limitations of the Taylor rule, which included the fact that “simple policy rules may not capture risk-management considerations.”

John Taylor was of course among the speakers, along with Richard Fisher the President and CEO of the Federal Reserve Bank of Dallas, and, Edward Nelson (an Economist of the Federal Reserve Bank of St. Louis.

The conference continues until this afternoon.

The Federal Reserve website is a great resource to help you understand the money and credit system. There are plenty of links and resources for consumers to educate themselves on everything from identity theft to avoiding foreclosure. It is extremely important these days to take advantage of all the financial education that is available. Many difficult financial situations can be avoided with the proper planning and other various tips on making, saving, and borrowing money.

One of the most difficult financial issues that many people are facing right now is the possibility of foreclosure. The Federal Reserve website offers links to various websites like the Federal Housing Administration, the Federal Trade Commission and the Internal Revenue Service. These websites have tips on dealing with foreclosure, ways to avoid it, and steps that you can take when you begin to have financial difficulties. If you are a struggling homeowner, this page would be a great resource for you.

Budgeting and saving resources are also available. The Federal Reserve Bank of Chicago website has a page dedicated to budgeting and saving. There are tools that can help you plan for short-term, intermediate, and long-term savings goals. There is also an explanation of how to create a budget with a sample budget-planning chart. Also on this page is a list of money saving tips.

The Federal Reserve Bank of Dallas website has a downloadable resource page on building wealth. It is “A personal finance education resource for schools, nonprofit community organizations, financial services providers and consumers to help young people, adult consumers, families and others develop a plan for building personal wealth. Presents an overview of personal wealth-building strategies that includes setting financial goals, budgeting, saving and investing, managing debt, and understanding credit reports and credit scores.” There are videos, booklets and CDs available as well.

Children need to be educated about the financial systems of our country as well. There is a Federal Reserve Kids page that makes all of the information accessible to children. It explains the role of the Federal Reserve, inflation, interest rates, and the form and function of the Federal Open Market Committee.

I encourage you to make use of all of these resources. They will not only help you and your children understand the financial system, but it can truly help you in your personal finances. Just about everyone can use a little help in that department.