Will the Fed Increase Interest Rates?
By: Mike Sweeney • July 2008
Mike Sweeney is the founder of http://www.LionSaves.com
String of Recent Cuts has Some Economists Concerned Trend Will Reverse
The Federal Reserve has cut interest rates several times over the last eight months in an attempt at boosting the economy. The relief the cuts were supposed to bring has not been felt and the concern is that the rates are about to rise while the economy is still, in what many economists consider, a precarious position. Should the economy show the slightest sign of recovery the Fed may decide to start increasing the interest rates.
Cuts were made continuously from September of 2007 to April of 2008 to help the struggling economy. Some economists have criticized the cuts saying the Fed waited too long to make the cuts and they should have been larger amounts to spark the economy. They point out a rate cut in January was done a week before a scheduled meeting, which shows the Fed realized it needed to "catch up." Now, the concern is the Fed will reverse the trend prematurely.
Stimulation of the Economy The cut in interest rates were done to stimulate the economy along with the economic stimulus package from President Bush in the spring. With the rising food and energy prices showing no signs of slowing down, it's become evident consumers have used their tax rebates for only the basics and for savings. The goal of the stimulus package was to get consumers to spend that money on a multitude of consumer goods thereby stimulating the economy.
Predictions for August Meeting The Fed is due to meet again in August. The market is not expected to move drastically in the meantime. Unemployment rates are still on the rise and the economy has yet to recover from its downward slide. However, there is speculation to suggest that interest rates will once again see a change this time upward.
State of the Economy The current state of the economy, by many measurements, is teetering on the brink of recession. The price of gasoline is averaging four dollars a gallon. Some consumers are unable to afford it, to the point of having to choose between gasoline or food. Short-term relief was felt from the cuts in interest rates previously this year but that relief was only felt by those with credit cards, new car loans or other short-term debts. Those seeking long-term mortgages didn’t feel any relief from the interest rate reductions.
As energy and food costs continue to rise, it causes a larger problem for the Fed. Normally, they place their focus on the "Core of Inflation" which measures consumer prices other than energy and food. This means the Feds are basing their inflation measure on other consumables that do not impact consumer's daily lives as hard as do food and fuel. Even so, the Fed feels the Core Inflation is a better measure.