The FED or Federal Reserve became a thing in 1913 to set the nation’s monetary policy, maintain the stability of the financial system and provide financial services to banks, the U.S. government and foreign official institutions.
The FED is our economic babysitter. For instance, the FED lowered the FED rate to almost zero during the great recession.This allowed money to flow cheaply between banks. In return, banks offered lower rates to consumers for houses, cars, credit cards.
The FED has kept interest rates near record lows for years after the financial crisis to encourage growth. But that was so 2017. This year the FED has aggressively raised their rate three times with a fourth expected in December.
So, why is the FED raising the rate? Conventional wisdom says it’s to curb the overzealous stock market and freewheeling spending by financial institutions. But…The main reason is to prevent the scary monster called Inflation, or the increase in what we pay for stuff and services. Inflation erodes the purchasing power of the dollars in our wallets and bank accounts.
I’m not that smart, my degree was in advanced synchronized line dancing, but my bank account is telling me the higher interest rates are diminishing the purchasing power of homes and cars. Maybe the FED needs to rethink their model. What worked in 1950 may not work in 2018. Just saying…
Diane Gerdes, November 2018