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Wednesday, February 27, 2008

Personal Finance QuickTake: Another Rate Cut Coming

Chairman Ben Bernanke signaled to Congress on Wednesday that the Fed is ready to again cut rates to help jump start the economy according to an AP story.

The Fed is in the unenviable position to get the economy moving while not fanning the flames of inflation, which is already showing its ugly head. Bernanke is fighting an uphill battle against home mortgage and general credit issues in the market. But the economy is the top concern, over inflation fears. He pledged to adjust a key interest rate and help the economy, which many fear is on the verge of a recession, if not already in one.

"The economic situation has become distinctly less favorable" since the summer, the Fed chief told lawmakers. The country should prepare for "sluggish economic activity in the near term," he went on to say. Concern continues to grow for a new period of stagnation, where inflation grows stronger while the overall economy is weak.

The Fed is prepared to lower rates again to bolster economic growth, Bernanke said. The Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," he said, sticking closely to assurances he offered earlier this month.

Bernanke said at some point this year, the Fed will need to "assess whether the stance of monetary policy is properly calibrated" to foster the Fed's objectives of price stability "in an environment of downside risks to growth." Bernanke said he was hopeful that previous rate reductions and the $168 billion economic aid plan of tax rebates for people and tax breaks for business would energize the economy in the second half of 2008.

"Should high rates of overall inflation persist," Bernanke said, "the possibility also exists that inflation expectations could become less well-anchored." If people think inflation is escalating, they will act in ways that could make things even worse, a sort of self-fulfilling prophecy. Also, if oil prices continue to skyrocket this year, it would be "hard to maintain low inflation," Bernanke acknowledged.

What this means for us:

Most believe that the Fed will cut rates in March and in April hoping to get the economy in good strides when the economic stimulus plan hits. If consumers are still worried, larger numbers then planned for would save or paydown debt with the funds instead of spending them in the general economic. This would minimize the overall impact.


RICHGUY said...

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RacerX said...

Thanks RichGuy!

I will check it out!

Thanks for visiting!

Sharon said...

This news is actually disturbing..its a downhill spiral that needs to stop soon.

Fiscal Musings said...

As for the economy, it can't be great all the time. We've gotten used to great economic growth, but times like these are inevitable. If we're able to weather these tough times, I believe we'll come out much stronger on the other side.

RacerX said...

@Sharon - Agreed. Bit scary!

@Fiscal - You are right, but we (The Government and Comsumers) can make it worse and longer!

Thank you both for being consistant commenters! IT mkaes the blog so much better!

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