Stock market indices were up again last week, with the S&P 500 reaching an all-time high mid-week. Part of this came from publicly-traded companies releasing earnings results (telling us how much money they made) for the third quarter. The Fed also impacted the market with another rate cut on Wednesday.
What is the Fed, anyway? The Fed is a nickname for the Federal Reserve Open Market Committee, which sets monetary policy. The Federal Reserve Banking System is made up of 12 regional banks. These banks hold the reserves of private, commercial banks; lend to banks to cover short-term cash flow issues; issue currency, and clear payments between banks. They are both private and governmental institutions, depending on the service being provided.
The Federal Open Market Committee (or FOMC) is made up of the seven members of the Federal Reserve Board, the president of the New York Fed, and four of the remaining 11 bank presidents. The FOMC meets eight times a year to review economic data and give guidance on the federal funds rate, or the rate at which banks will lend money to each other, typically overnight. This interest rate then drives the rates at which banks will lend money, and the rates they pay to depositors.
Unlike most central banking systems in the world, which have low, steady inflation as the key goal, the US operates under a dual mandate – both full employment and price stabilization, or low inflation. When they raise rates, they are tightening the money supply – making it less attractive to borrow money. When the Fed lowers rates, or loosens the money supply, they are encouraging companies and people to invest in equities, and to borrow money, both of which put more money into the economic system.
The lower rates mean variable interest rates on credit cards, home equity loans and such, will go down. Savers will suffer as banks will also lower rates paid on savings accounts and certificates of deposit. By lowering rates for the third time this year, the Fed is continuing to stimulate the economy, and keep our current economic expansion going.
What does this mean for you? You may wish to look at your current mortgage rates, to see if refinancing makes sense. Evaluate how much cash you have on hand, and see if it’s being to put to the best use.
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