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So what happened today and what does it mean?
The Federal Reserve had an announcement after their regularly scheduled policy meeting today.
First let’s revisit the Federal Reserve. It is not part of the government. It is not owned by the government and it is not run by the government (directly, anyway). Huh?
The Federal Reserve Bank was created by Congress to issue the currency and to manage the banking system free from political influence. The Fed, as it is called, is owned by the member banks that it charters and over sees. There are 12 Federal Reserve Bank Areas or Regions each headed by a President elected by the member banks of the Region. They, along with a Chairman, appointed by the President and confirmed by the Senate make up the management of the “Fed”. The oversight of the “Fed” is the seven members of the Board of Governors, The Chairman, previously mentioned and six others appointed by the President and confirmed by the Senate. Today there are two open positions. The FOMC (Federal Open Market Committee) which meets regularly to determine appropriate strategy for the achievement of the objectives of the “Fed”; that is to keep inflation under control and then to assist the economic growth. The FOMC is made up of the seven members of the Board of Governors and 5 of the 12 Presidents of the Regional Federal Reserve Banks.
That said, the FOMC today said that it anticipated keeping the effective interest rates low for an extended period of time, perhaps until 2013. That is to say the economy is weak and we don’t see any significant growth out there that might be inflationary in nature.
What that means is that mortgage rates are going to stay low for a while, credit card interest rates are going to remain at current levels. HELOC’s typically based on 10 year Treasuries are going to remain at current rates. If you are in the market to refinance, now may be the time to lock in low rates. It also means if you are living off interest on your CD’s, you are not going to have much income.
The bond market liked that statement and bond yields declined as prices rose. The stock market wasn’t certain about it in the hour immediately following the statement, but seemed to decide that it was OK and retraced its declines today returning to substantially positive territory at the end of the day.
For those looking for a job, it is a mixed condition. Businesses now know that the “Fed” understands what we have known for some time. Growth is going to be slow and hard to come by. Competition is going to remain fierce. That isn’t good for job growth. On the other hand, low interest rates mean that additional plant and equipment will be affordable and loans may even be accessible. That could create jobs in other businesses.
The economy is like a bunch of dominoes. If one falls it pushes another and if that one falls it pushes another etc. etc. etc. We need to get the Dominoes to fall. To do that we may have to change our political precepts of taxing businesses on money earned overseas. If US corporations could bring home the money they make overseas without being taxed again (already been taxed where it was earned) then maybe they would spend it here and start the dominoes falling. Wouldn’t that be grand?
