On Wednesday, the Federal Reserve announced it would keep the federal funds rate in the 0-.25% range. The federal funds rate is the rate at which banking institutions lend to each other overnight.
The lower the rate, the more money is available in the economy due to more of a willingness to borrow. The federal funds rate has been at this historic level since December of 2008, according to the Board of Governors of the Federal Reserve System.
In its statement, the Federal Open Market Committee (FOMC) said that while the economy is beginning to show signs of being on the mend, they will continue to keep the fed funds rate low. They also repeated a portion of their statement from a meeting earlier in the year that the current economic conditions are “likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
The FOMC said that the currently low inflation rates help to validate the need for keeping the rate low. However, many are worried about the inflation issue. If rising inflation becomes an issue in the economy, the Fed will have to raise rates to keep inflation rates in check.
“I think the Fed is willing to take some chances to make sure the recovery really takes hold…the Fed may begin to modestly raise rates in the spring or summer of next year.†Michael Strauss, chief economist for Commonfund told CNN.
The Fed also addressed another part of its plan to push money into the economy. They will go ahead with their deal to purchase $1.25 billion of mortgage backed securities from the embattled Fannie Mae and Freddie Mac, a deal which should be complete by March 2010.
Our Take
It’s a good sign for everyone that we are finally seeing a light at the end of the recession tunnel. The powers that are making cautious and conservative financial decisions are more prudent than the decisions that lacked foresight that got us into such a mess.
While there is no quick fix for the economy, the low fed funds rate will help to keep the economy liquid which will help to slowly fuel economic progress.
