Ok, kidos, pull up a chair. It's been a while since I've schooled you so today I wanna take time and get you caught up to speed on The Federal Reserve System (also called, "The Fed"). The Fed is a largely unknown entity by the average person, yet it has the greatest impact on your money than anyone else. In today's "Learning with Leonerd"
session, I'm going to get you up to speed on The Fed and how the latest FOMC meeting affects you."So first up, who is The Fed?"
The Federal Reserve System, aka "The Fed," is the government agency that is responsible for the country's monetary policy (which differs from fiscal policy, but that's a different lesson). Janet Yellen is its Chair, or leader. Their big three responsibilities are to maximize employment in the country, maintain stable prices and to govern long-term interest rates."Ok, so why are you just now bringing them up?"
The Fed has a Federal Open Market Committee (FOMC)
that meets periodically throughout the year. When they get together, the make decisions about where the country is and where they think the country should be and then they make a plan to reconcile the two. On 16 and 17 June, the FOMC and made a decision regarding monetary policy that affects you and me, so we might as well learn about it."So then, what did they say?"
Quite a few things. The full decision is linked to this post, so I'll just hit a few points:"Growth in household spending has been moderate and the housing sector has shown some improvement..."
This means that consumers (you and me) are spending money and driving the economy forward but we're not spending more or less now than previously. This isn't a bad thing although, as the FOMC and other regulating and oversight bureaus see it, it's not the most ideal situation for the economy."Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate..."
The Fed influences interest rates as a way to affect prices (like what we pay for goods) and employment (interest rates affect consumers and businesses alike). Presently, interest rates are near-zero (a fraction of a percent), which is a historic low. Despite this, however, The Fed is expecting for economic conditions to become more favorable in the medium term and allow for interest rates to begin to rise."To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate."
Although The Fed believes that they will eventually raise the interest rate, for now, they've decided that keeping the rates low, between zero and 0.25%, is the appropriate thing to do."So what does all this mean for me?"
As we've learned, interest rates are not going to get any lower than they are now. In fact, in the medium term, we know that they're going to go up. This means that the interest rates for personal and small business loans, mortgages and more are going to be offered at a higher rate than what they are now (and if you don't have a fixed-rate mortgage, then you interest rate may go up as well). This will make it harder for some to receive loans as well as making it harder for some to pay loans. This also means that the interest rates on savings accounts and other "positive" forms of interest will go up as well. This will make it easier to save for those who do (and you do save money, right?). So, raising the interest isn't necessarily a completely good or completely bad thing.
All in all, if you're in a position where you need to exercise your finances (such as an entrepreneur who needs a small business loan, someone looking to responsibly establish credit with a credit card, take out a home loan or more), there's no better time to do so than now. As you know, interest rates can only go up and it'll be harder to these things once the rates are raised. If you find yourself on the other side (you have bonds that are close to maturing, you don't have fixed-rate loans or more), take this information as a cautionary tale and start making a plan for how to address the interest rates rising.#LearnWithLeonerd #FOMC #TheFed #Federal #Reserve #System #Yellen