Despite some indications that the economy has started to recover, the Federal Reserve continues to keep interest rates very low, and is unlikely to make any official announcement about rates changes until there are more significant changes in the economic outlook.
In a speech at Carleton University, the Fed’s Vice Chairman Donald Kohn stated that the Fed will continue to look at factors such as unemployment and inflation to determine if their pledge to keep interest rates low will change.
“Central banks cannot make unconditional interest rate commitments based only on a time dimension,” said Kohn.
How the Fed rate affects you
While the Fed interest rate may seem like an arbitrary number, it has widespread implications for consumers and the economy at large. Low rates generally contribute to fast economic growth, and banks start to lend less as rates increase. When banks lend less, businesses usually slow their spending and expansion.
A low Fed interest rate also has more immediate effect if you are in the home buying market. As rates increase, your payments will increase. That means if you are looking to buy, now might be the time, before rates start to rise. A higher interest rate, however, can also help offset inflation, so every day items will be less expensive than they otherwise might have been. Employment often goes down as rates increase, due to businesses spending less. The nation’s rocky unemployment situation is likely one of the major factors influencing the Fed’s decision to keep rates low right now.
Why rates are low
The Fed dropped interest rates to their current near-zero levels back in 2008 in an attempt to carry the U.S. economy through the recession. The low rates kept funds available and sent a message to financial markets that they were going to be backed for the duration of the crisis.
With some indicators pointing to the fact that the economy is back on track, the Fed is watching closely to see if the recovery is in fact stable enough for them to start to slowly increase the interest rate. However, with worries about inflation and the economy overheating, many experts believe this confidence in the economic outlook will not come until at least 2011.
Waiting on the Fed
Right now, the Fed is in the middle of a balancing act between pulling the U.S. completely out of the recession and ensuring consumers are confident in the government’s ability to stave off inflation. Where this tipping point lies is uncertain. In the next few months, economists and investors will closely watch the Fed’s every move.