Federal reserve bank drops the federal reserve rate?

Could this be the headlines on the internet at the end of the month? With all the talk of a recession just around the corner is there anything that can be done to prevent a recession? The federal reserve chairman, Ben S. Bernanke, gave strong suggestions that the fed would cut interest rates very soon and maybe by a larger than expected amount. That last cut was 1/4 % and this cut some predict could be as much as 1/2 %. Currently the rate stands at 4.25% and some predict that this summer we could see the rates drop as much as 1.25% to a 3% rate! So who is the US Federal reserve system or the federal reserve banks, what does it mean when the rates drop, and how does this rate drop effect you?

What is the federal reserve system?

The US Federal Reserve System is also know as the Federal Reserve or simply “the Fed,”. It is the central bank of the United States. The federal reserve was created by Congress in 1913 to provide the US with a safer, more flexible, and more stable monetary and financial system. The fed is comprised of twelve regional Federal Reserve Banks located in major cities in the US. These banks are responsible for regulating certain financial institutions and activities, providing banking services to the US government, and make sure we get fair treatment in business with our banking system. More important for this article they are responsible for setting federal reserve rates or federal funds rate.

What does it mean when the federal reserve rate drops?

The federal funds rate is basically the interest rate that banks charge to lend each other money. The rate cuts are intended to increase consumer spending and encourage consumers to borrow more money, thus improving the economy. This should in theory help to prevent a recession. Currently consumer spending is VERY low so anything that the government can do to help should be an improvement.

How does this rate drop effect you?

Well, as mentioned earlier the rate drops should also eventually drop the interest rates that banks and other lending institutions charge us consumers. That means lower interest rates on home loans, auto loans, credit cards, and personal loans. You can borrow more money to buy more things which in turns stimulates the economy…

My take….

Sure it’s a great concept and I’m looking forward to seeing mortgage rates fall to a new all time low. I would love to refinance my home for 15 years at a 4% interest rate, but do I think this will solve the problem…. Not really. The lower interest rates would stimulate economical growth, but that means more consumer spending. Home mortgages rates would drop significantly encouraging more and more people to buy houses they really can’t afford, cars they don’t need and general stuff that’s unnecessary. Isn’t that what got us into the mess we are in right now? So does this really solve the problem or in the long run are we just going to repeat this cycle again?