Federal Reserve & Interest Rates

Everyone has been waiting for the Federal Open Market Committee to confirm the rate cut.  It hasn’t truly been a question of whether or not a rate cut would happen, but a matter of how much.  The FOMC did choose a modest 25 basis point reduction, making the federal funds rate 4 ¼ percent.

It is no secret that the economy is really slowing down.  The housing correction is definitely being reflected in the greater economy.  There has been some strain in the financial markets recently as well.  The FOMC made the additional rate cut at today’s meeting with the hopes that this action, along with previous actions will promote moderate growth over time.

According to the Fed’s statement, inflation remains a concern.  While readings on inflation for the year have improved modestly, commodity and energy prices might drive it up again.  The FOMC intends to keep a close eye on the situation.

What does this mean for consumers?

Overtime, the reduction in rates will help the average person save on interest.  Revolving credit card balances, mortgage interest rates and other consumer debts will accumulate less interest.  Minimum payments may remain the same in some cases, but with less interest total debts can be paid off in less time, saving thousands of dollars.  Many companies are giving special lower interest offers as a result of the rate cut, however, accumulating more debt is not a wise thing to do with the risks of recession so high.

The greatest impact will be the rates that banks charge one another for various transactions.  By lowering the amount that banks have to pay, there is therefore more liquidity in the overall financial system.  This helps the financial markets as well.  It is this liquidity that adds to the amount that banks are able to lend consumers, and as I just mentioned, allows for very slightly lower interest rates.

Has the outlook changed?

A positive outlook tailed the October rate cuts, and the FOMC seemed confident that they had made sufficient moves to pull the economy through.  Inflation remained a concern, as did the mortgage lending problems.  The markets seemed to be doing well, for a short while, and the Fed thought that they would not need to make any further actions this year to stave off recession.  According to the press release, “Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation.”

Our fluctuating economy has made it very difficult to pinpoint where we are headed.  Some say we are diving head-first into a recession, and others say we are already there.  Regardless of what we want to call it, the economy is unstable.  We saw some signs of improvement in early November, but the fact of the matter is things will get worse before they get better.  Overall consumer confidence has weakened, the dollar is weak, and credit is getting tighter by the minute.  Hopefully the rate cuts will provide eventual relief.

The Federal Reserve Board is doing everything within their power to prevent a major depression.  It is not an easy job, but someone has to do it.