The Federal Reserve has moved to keep interest rates artificially low through 2015 in an effort to bolster economic growth and raise employment numbers.
As one of the world’s big central banks, the Federal Reserve has a unique twofold mission. It is charged with both keeping inflation low and stimulating employment. Most central banks only have the first job, not the second one.
Because inflation is not an issue right now, all of the Fed’s efforts are focused on the employment picture. Currently, the official unemployment number is 8.1, while the more comprehensive metric I pay attention to, U6, is around 15.
Keeping interest rates low effectively eviscerates savers and those on fixed incomes living on savings.
On the employment front, the Fed has released projections about what employment will look like in the future. By next year, they expect unemployment to go down to between 7.6. and 7.9. Then in 2014, they’re projecting unemployment of between 6.7 and 7.3. Finally by 2015, their projections suggest it will be between 6 and 6.8.
So you get the idea; it’s a slow trend line in being able to get everybody back to work who wants to work.
How will the Fed achieve this? By pumping $85 billion a month into the economy through the purchase of bonds, which will drive down interest rates. That level of money they’re prepared to throw into the economy will be more than double what they’ve been doing so far.
While the Fed holds down interest rates for savers, the interest rates for borrowers are unbelievable. Car loans have interest rates starting in the 1s at credit unions. It is possible that mortgage interest rates could down even more as a result of the Fed’s latest announcement, though there’s not a lot of wiggle room.
The mortgage market is in a chokehold with the giant banks controlling most of the business. So if you do want to take advantage of possibly lower rates in the coming weeks look at mortgage brokers, credit unions, small local banks. Avoid the brand name giant banks like Wells Fargo.
The issues the Federal Reserve is dealing with will be core to the November election. Yet what the Fed did today will have no direct impact on the election less than 8 weeks away. Their moves will play out in the long term, not the short term.