a bit about the Fed
Today I learned… that the Fed is likely to cut rates again at its December 11 meeting. Recall that they cut rates by a quarter of a percent at the last meeting, from 4.75% to 4.5%. The cut is speculated to be a half percentage, bringing the target rate to 4%.
What is the Fed? It’s the Federal Reserve System, the central banking system in the US. Currently Ben Bernanke is the Chairman of the Board of Governors of the Fed. The Fed has a dual mandate: to promote stable inflation and maximum employment.
To do so, it controls the Federal Fund Rate, which is the interest rate at which banks lend accounts at the Federal Reserve to other banks overnight. The Fed actually only sets a target rate, where they think the interest rate should be. They don’t set the REAL rates, because those are determined in the open market. Why do banks lend to each other? Because the Fed requires that each bank must have a minimum amount of reserves (accounts) deposited in the Fed compared to their receipts from customers.
Why does the target rate matter? Well, it’s basically controlling the supply of money. So when the interest rates are low, people are less inclined to put money in the bank (their return on their investment, or the money they earn on what they put in, will be less). Thus, they’re more likely to increase their spending. Since there is a scare of a recession, and the thought is that consumer spending will be down this season, the Fed wants to make sure consumers will still spend their money, especially during this holiday season. On another note, however, from a global perspective, people are less inclined to put money into the US $. This definitely does not help our dollar, which is paling in comparison to the euro… (it closed at $1.48 yesterday)
Why does this matter to you? Well, your money is worth less. That money you have in the bank will not be generating as much interest as it was before. And so it goes.
More to come on Dec 11.
