Federal Reserve & Interest Rates

The Federal Reserve is receiving a lot of criticism for last week’s move to offer “non-recourse, back-to-back financing to JPMorgan Chase.” The Bear Stearns Companies Inc. was taken over by JPMorgan Chase, thanks to the help of the Federal Reserve. So, what’s wrong with the Federal Reserve giving billions of dollars to a major bank so they can make a rapid expansion? Perhaps it is the fact that the funding source is the money of hardworking taxpayers.

Why was this approved? Our economy is sinking rapidly. It seems like the Federal Reserve made a move that benefits yet another wealthy investor. The theory must be the age old idea that if you keep the wealthy rich, it will eventually help those down at the bottom. For some reason, I am skeptical about how that actually works.

Those that are really suffering during this time aren’t getting that kind of help. A monster corporation that is doing really well just wanted to take over another company that was sinking. The Fed came to the “rescue.” How many hardworking taxpayers need help just to pay for their mortgage so they don’t get tossed out onto the street, and they don’t get that kind of “rescue.”

The rich get richer and the poor get poorer. It doesn’t seem to end. Some say the move was also meant to help Wall Street.

I don’t like the message it sends. As a consumer and a middle class to lower middle class borrower, you can’t make any rash credit decisions. There is just no mercy for you. It is alright, however, if you are a major corporation because the Fed will come to the rescue. That just doesn’t seem right.

Aside from the moral view, many say that the bail out of Bear Stearns was not an economically sound decision. Allowing JPMorgan Chase to take it over at a cut rate was not a good idea according to many. This is a risky choice, because if the company was weak and had problems, they could spread to Chase. Experts say that failing corporations need to die, and stronger companies need to make it on their own strength. How can the economy become resilient on its own if the Fed is favoring large corporations, and spoiling them with funding? Struggling small businesses don’t get that kind of help from the government.

When the rich get richer, the poor get poorer. Why is it that the government wants to aid the ones who already have what they need and neglect those who really are in need?

The Federal Reserve has reduced the interest rates to the lowest point in three years, with yesterday’s cut being 75-basis points. What does this mean for consumers? The rates only directly affect the amounts that banks have to pay to borrow on a short term basis. As a result, the banks may eventually choose to reduce the interest rates that they charge borrowers. The downside to lower interest rates, however, is that interest bearing accounts consumers are using to save money will earn less.

Borrowers with short-term adjustable rate loans and credit cards will probably begin to see a reduction in monthly payments and interest charges. Those that have good credit will benefit the most from this. Short-term loans like personal loans, auto loans, and equity loans, may actually see a visible difference in their monthly billing statements. Those with adjustable rate mortgages may also see lower payment requirements. Borrowers with poor credit, high revolving balances, and habits of defaulting or only paying the minimum, may not see the benefit of the rate cuts.

Those trying to save money through interest bearing accounts may be a bit disappointed. Money market accounts and certificates of deposit (CDs) accounts will not be yielding as much as they were even a couple of months ago. Savings accounts may not offer the same interest earning appeal as they did before. There are still some internet banks that offer higher rates that could benefit those who are looking for a higher interest yield on their savings. Even though there is a higher return on many internet banks, rates are lower for those accounts than they once were.

The other downside for consumers is the risk of inflation. When rates are lower, it leaves room for pricing increases. Prices may begin to rise again, even though they held steady on average last month. Addition cuts may trigger further rises in costs. Meanwhile, savings accounts will be bearing less, as I mentioned.

Overall, debt will be easier to pay back, while saving money for the long term will be a bit more challenging in the months ahead.

On Tuesday, the Federal Reserve slashed a key interest rate by three-quarters of a percentage point. This is the latest in moves by the central bank to do their best to restore confidence in the economy and troubled financial markets. The Fed cut its federal funds rate for the sixth time in the past six months, an overnight bank lending rate, to 2.25%. Although many believe the economy is in a recession, this cut comes at a time when the Fed is trying to keep the economy from slipping even lower.

Interest rate cuts are usually viewed as beneficial for the economy since they typically lead to more lending. The federal funds rate affects how much consumers pay on credit cards and home equity lines of credit, as well as the rate paid by many businesses on loans tied to banks’ prime rate. But some experts think lower rates won’t solve the credit crunch paralyzing Wall Street.

Many are worried the rate cuts will cause a continued weakening in the value of the dollar and a further spike in commodity prices — which could lead to higher prices for gas, food and imported goods.