Fed on track to keep rates low: a good thing?

12 08 2009

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By Michelle Ash, CFP®, CDFA™

Fed Chairman, Ben Bernanke, and colleagues are scheduled to wrap up a 2-day meeting later today.  It is widely expected that they’ll leave the key interest rate, the federal funds rate, at record lows: between 0% and 0.25%.  The federal funds rate is the basis for all other lending rates: intra-bank rates, banks to businesses, and banks to consumers.  Some economists predict that the Fed will keep this rate at this level through the end of the year; the rationale being that a super-low lending rate will spur Americans to spend more, which in turn supports the economy.

Personally, I’m not so sure keeping the rate low to spur spending will work, for two key reasons.  Primarily, the low rates are not necessarily trickling down to those who would spend: businesses and consumers.  Many companies have seen their credit lines pulled or not-renewed, leaving them to scramble for financing.  Consumers have seen credit reduced, rates increased, and significantly more effort required to obtain financing for secured and unsecured debt alike.

Secondly, and perhaps more importantly, have we, as Americans, perhaps learned our lesson about spending?  Overuse of leverage was a significant cause of what’s now being called the “Great Recession”.  Savings rates have increased significantly.  Many Americans worry about the deficit spending occurring by our nation through the crisis.  Will Americans return to the mass-consumption tendencies of the last several years, or have many of us learned our lesson and reverted to more traditional financial postures?  Only time will truly tell.

This blog is for informational purposes only.  This is neither an offer to purchase nor sell any securities.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  All information is obtained from sources deemed reliable but not guaranteed.  Past performance is not a guarantee of future performance.  No tax or legal advice is given nor intended.

Investment advisory services provided by PARAGON Wealth Strategies, LLC, a registered investment advisor. 

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