Federal Reserve & Interest Rates

Our Congress leaders and President Bush have agreed to go forward with the fiscal stimulus package. The plan is to distribute $150 billion into the hands of U.S. consumers with the hope that the extra cash flow will encourage spending. With consumer spending at a low point comparable to previous years, Bush and Congress members hope the incentive will spur the retail market. For this economic stimulus plan to work, consumers need to start spending.

The stimulus will be distributed depending on marital status and dependents. Single people would get $600, Married couples would get $1,200, and those with children would receive $300 per child in addition to the initial funding.

In order to effectively boost the economy a majority of the people receiving the stimulus package have to feed it back into the economy. The president and Congress are hoping we will take a vacation, buy a computer, or get some new clothes. Some people are prone to spend any extra money they have, but with the economy slipping the way it is, consumers are more hesitant to let go of their cash. This is in fact why consumer spending over the holiday season was much less than expected.

Many people will probably be looking to pay down debt or hold on to the money. Savings accounts and CDs are definitely places where some of this money is headed.

Will the new stimulus package work to boost the economy? Some people will at least spend a little bit more then they would if they didn’t have the extra cash from the government. That should help a little bit. Consumer spending accounts for more than half of the nation’s economic performance. If a good amount of people spend the money, it could give a short term lift to economic conditions.

What about the long term? Who knows?

The stimulus plan has yet to pass the House floor next week before a final decision is made. The move doesn’t seem like it would be enough to stave off a recession, but it could help consumer spending even the money isn’t spent right away.

Alan Gayle, senior investment strategist in Virginia thinks that this move, in conjunction with the recent surprise rate cuts, is a positive move for the economy. He thinks the market could definitely benefit from these moves, but it will take time to really see the effects.