Fed Leaves Interest Rates Alone For Now

Finance Tid Bits

Fed Leaves Interest Rates Alone For Now

27th June 2009

The U.S. Federal Reserve bank announced that they would leave interest rates unchanged for the forseeable future or as they put it "an extended period". At the moment the interest rate is near zero, currently standing at 0.25%. The question of interest to you and I is if interest rates are low, how does that affect us? There is a link between interest rates and inflation or deflation so let's take a look at that in more detail.

Personal Finance The point of lowering interest rates is to enable consumers to have more spending capacity or buying power. If interest rates are low, the intention is to put more money in the hands of the consumer. This is the intention of the Fed on lowering their interest rate according to Fed policy. For this very reason that you and I supposedly have more money in our hands, the inflation rises. However, in recent months instead of inflation, we have experienced deflation.

What is deflation? Well inflation means the rise in price of goods and services so since deflation is the opposite, this would mean, a fall in the price of goods and services or negative inflation which in short is when inflation falls below zero. Deflation also then causes a contraction in the economy which has happened and a decrease in wages which is currently happening. What's going on here? W ell with interest rates being as low as they are and the economy contracting it simply means that the federal reserve has failed to stimulate demand by lowering interest rates this is one of the reasons why they have left the interest rate as is because even if they dropped it any further, demand will not necessarily increase.

So this means that the real value of money has increased in the last three months since we've experienced deflation from March to May with the inflation rate for May standing at -1.28%. So how does this affect you and me? If you have an investment or index-linked savings which is usually linked to inflation, you will be paid much lower returns this year due to deflation. However, although interest rates are low the real value of money is higher so you score if you put your money away in a savings account.

It is quite difficult to determine if deflation is temporary or if it will be a long term scenario in the current economic recession. As individuals we cannot really control deflation as it is happening in the whole economy. The best you can do now as an individual is ensure that your personal finances are in good shape and that you keep a tight grip on things and not lose control of your finances in these difficult times.

"The waste of money cures itself, for soon there is no more to waste. " - M.W. Harrison

Comments (6):

Nancy Says: Makes sense then for the feds to leave interest rates alone as since deflation took place there are no guarantees that reduced interest rates would encourage people to start shopping again | 06.27.2009 |

Anne Says: Informative piece of information. Thanks Kev | 06.27.2009 |

Rosie Says: Something needs to give with this recession | 06.27.2009 |

Trisha Says: So we can't control the economy but the good news is we can control our finances | 06.27.2009 |

Terence Says: Yes Trisha we can control our finances because even if you lose your job, you can still cut on spending and look for other means of income | 06.27.2009 |

William Says: The fed controls the economy | 06.27.2009 |

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Fed Leaves Interest Rates Alone For Now

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