Federal Reserve leaves funds rate at 2%

The Federal Reserve Board has once again decided to leave a key interest rate untouched. What is their reasoning behind this?

Existing Pressures

In its press release, the Fed pointed out the already existing pressures on Wall Street, employment, household spending, and inflation:
• On Wall Street: Strains have "increased significantly"
• On Employment: The workforce has "weakened further"
• On Household Spending: It's "softening"
• On Inflation: It's "been high"

The Fed believes though, that the combined impact of these pressures will eventually die down by both prior rate cuts, and market forces. Let’s not forget, that just last August, the Fed Funds Rate was 5.250 percent and the Fed wants to avoid over stimulating the economy. Too many rate cuts could be counterproductive and detrimental in the long run.

Injecting Money

The Federal Reserve controls the supply of money and its cost by injecting funds or taking funds out of the banking system. The Fed has already recently injected $50 billion to curtail instability brought on by the collapse of Lehman Brothers and the problems of American Insurance Group.

Fed helps bring liquidity
• The Fed buys government securities from banks in exchange for lending them money, in order to increase the money supply and make money easier to borrow.
• Banks that borrow the money, then lend money to other lending institutions.
• The other institutions lend to consumers.

Theory

Part of the economic theory behind leaving the rate unchanged, is because the Fed does not want to create the sense that it is going to rescue more struggling companies. Could this affect risky decisions made by large companies if they felt the government would bail them out if needed?? Give us your comments.

Economic growth over the next few quarters is likely to remain flat, but over time, the considerable easing of monetary policy, combined with continuous plans to promote market liquidity, should help to encourage moderate economic growth. Do you think it makes sense to leave the rate at 2%?

If you're wanting a plan to monitor and lock-in great rate dips like the ones we’ve been seeing off and on, get in touch with us and we’ll walk you through the process to capture a low mortgage rate when it presents itself. Call us at 913-642-3334 or email at michele@wantinsight.com.

Michele “MAC” Cole
913-642-3334
www.wantinsight.com