The 10 brilliant minds who make up the Federal Reserve met yesterday to once again discuss the state of the economy and determine the action needed by them to aid a struggling American economy. The Fed funds rate is one way the Fed uses to regulate the supply of money to the US Economy.
In an aggressive move, they lowered another .75 percent, targeting a new Fed funds rate between 0 – .25%. This is the lowest Fed rate on record (I looked).
The following is an official press release from the Fed regarding its decision today, and a translation (for the rest of us) of all the financial jargon by Bob Walters, (who is EVEN SMARTER than me – GASP!) Chief Economist for Quicken Loans:
Release Date: December 16, 2008
For immediate release
Now
The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.
This is a new one. Usually the Fed (that group of bankers that determine what short term rates will be) establishes a specific target rate. This time they have established a target RANGE. Fancy… it is quite extraordinary that they have taken short term rates effectively to 0%.
Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
In the last 6 weeks or so, lots of people got laid off, and both people and businesses are spending less dough. Banks are tightening lending guidelines And the economy is in a general uphill battle.
Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.
Prices of stuff is falling. Given that gasoline and oil prices, food and other raw material prices are falling, and given that the economy is likely to continue to be struggle, the Fed thinks the price of stuff will continue to be low for months to come.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
The Fed is throwing the kitchen sink, the dishwasher and the Ginsu knives at the problem. They have taken short term rates to 0% and they are spending money to fix things as if they could just print it on paper (oh… they can…) Given the economy’s struggles – the Fed believes that short term rates are going to stay low for quite a while.
The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
This paragraph basically says that the Fed is going to spend A LOT of money buying bonds from Fannie and Freddie and buying mortgages to help out the mortgage market (hooray!) Beginning next year, the Fed will use the Term Asset-Backed Securities Loan Facility to help in extending credit to small businesses and others. In other words – since the banks in America have tightened lending – Uncle Sam is going to help!
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
All the smarty-pants agreed.
Kelly’s Nerdy Notes: If you’re reading this and haven’t considered talking to a mortgage expert about refinancing, you may want to check your pulse. 30-year fixed rates are hovering in the low 4-5% range right now and for mortgage nerds like me, well, that’s kind of like having a party in my number-crunching head.
My strongest suggestion is not to wait. This kind of history is usually short-lived. All homeowners should take 15 minutes to make absolutely sure they’re in the right mortgage. This is, for lack of better nerdy words, a truly historic time in the world’s economy. And ….lucky you, your friends at Quizzle and Quicken Loans are ready to help.
Questions? I love e-mails! KLaVaute@Quizzle.com
