federal reserve

Why the Fed Worries About Inflation

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The Federal Reserve, like many government agencies and organizations, has a dual mission. On the one hand, it is the Fed’s job to keep the economy running smoothly and maintain the economic and monetary systems the country depends upon. On the other hand, it is the Fed’s job to prevent rampant inflation from crippling the economy. Doing one job well, sometimes means messing up the other job. Under normal circumstances, the Federal Reserve uses its power to set interest rates to moderate the ups and downs of the economy. In a free market system, there are periods of expansion and contraction (good times and bad times). These variations in the economy occur for two main reasons. First, people (as a group), do not always behave rationally. Second, even when people are behaving rationally, there can be a significant lag between the arrival of data and the impact of that data on decisions. For example, when we talked before about how inflation works, we talked about a man named Brad who, when prices rise, cuts back on spending by cancelling his gym membership. Theoretically, the exact moment for this to happen is when Brad’s expenses increase beyond his income. However, in …

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Good Economic News and Inflation

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It seems any time economic news gets reported, there is a good news / bad news sort of thing going on. If there is an economic report that offers up good news about the economy, that is paired with the bad news that the Federal Reserve is either not going to do anything (recently) or may move to increase interest rates. Either way, that seems to worry some people, no matter how good the economic news might seem other wise. The Fed and Inflation The Federal Reserve’s mission is to regulate the U.S. economy independently of the U.S government. That role has never been as important as it has been lately when Congress and the President seem constantly paralyzed by politics from taking any steps or implementing any policy to help the economy. In particular, the Fed’s role is to help regulate U.S. monetary policy. This is a historical mandate, and it shows that those who created the Federal Reserve had remarkable foresight, because what is good for the country’s economy does not often square up with what is good for the political parties that want so desperately what to gain and hold power. There are two main missions for …

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Fed Keeping Interest Rates Low

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In an announcement that comes as no surprise, in large part because it has been repeatedly telegraphed by the the Fed itself, the Federal Reserve Board on voted on Tuesday to leave interest rates at their current near zero rates. The Fed further reiterated its commitment to doing so for the near future, pledging to keep rates low through at least the middle of 2013. There are several interesting implications for investors and consumers in the Federal Reserve’s actions and statements today. First, as mortgage lending continues to languish and be a rather slow and dour corner of finance, homeowners should take solace in the fact that there is no rush. While there is no guarantee rates will stay exactly as low as they are, the Fed’s continued commitment to low interest rates means that neither new mortgage interest rates or adjustable mortgage rates are going up any time soon. Second, the Fed announced that it would continue to implements the so-called “twist” in which the Federal Reserve is moving its short-term bond holdings to longer-term bond holdings in an effort to bring down long-term interest rates. Longer term rates are traditionally less influenced by the Fed, which sets only the short-term …

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First Ever Fed Press Conference

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Today marks the first time the Federal Reserve will hold a press conference to go along with it’s decision on whether to change interest rates. Most observers expect the Fed to leave interest rates unchanged (basically at zero percent), so the real action will be in the details that emerge from the press conference where questions about how the economy is doing, what the Fed is doing, and how long they think those things will last, will take center stage. In another change, the Federal Open Market Committee will also release the quarterly growth and inflation estimates that is uses to make its rate decisions today. Usually, the Fed releases those numbers weeks later. Today’s changes could make for a very volatile day in the markets because no one has ever done things this way before, so no one really knows how they are supposed to react. Will the markets over-react to something Fed Chairman Ben Bernanke says? Will the markets react less than they would otherwise given how fresh all the data is? Or is this all just a bunch of sound and fury signifying nothing? We’ll all find out later today.

Banks to Buy Back Shares, Raise Dividends After Passing Fed’s “Stress Test”

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Several major banks, including most of those deemed “too big to fail,” are set to raise their dividends and announce large stock repurchases after passing the latest Federal Reserve “stress test.” Banks and financial institutions that have repaid their government bailout TARP funds and passed the stress test have been given the go-ahead by the Federal Reserve to make new capital-based decisions such as increasing their dividend payouts or doing share buybacks. Shortly after the Fed’s announcement, the financial sector came alive with press releases about how the banking stocks would take advantage of the new allowances. J.P. Morgan announced both a higher dividend and a share buyback, for example. Banks Raising Dividends After Drastic Cuts During the height of the banking crisis, most banks and financial stocks were forced to cut their dividends to minimal levels, or even to zero. Eliminating their dividends took away one of the major reasons to invest in financial stocks, which historically have provided solid dividend income to investors. Even the the financial sector’s best preferred stocks were forced to slash their dividends. The quick moves by the big banks and Wall Street firms to reverse their dividend cuts offer a glimpse at how …

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Inflation Stays Tame – Fed Not Raising Rates Soon

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Everyone is worried about if and when the Federal Reserve will raise interest rates, even though the Fed itself continues to say that it is not considering doing so. That is what happens when interest rates are so low (basically just above zero) that everyone knows the only way they can go is up.