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Monday, December 15, 2008

After rate cuts: The Fed's new ball game

Since September of 2007, the Fed has been cutting the interest rates. At the moment there have been 4.25% points of cuts since September. However, none of this has done anything to help stimulate the economy, and things have only gotten worse. Economists are expecting the Fed to cut the rate again, which it is unknown whether this will help the economy or not, but it will put the interest rate at 0.5%. This would be the lowest rate that we know of.
Despite these rate cuts, the Fed is starting to print money that would help finance its liquidity programs. Though, further down the road this could lead to more problems. "Buying up droves of Treasurys may also help encourage banks to lend, as government yields dip even lower into already historic lows. Gaining little return on those investments, banks may be forced to return to their traditional money-maker, issuing loans." The Fed is looking to start up a program it likes to call quantitative easing, which is basically just printing money and putting it into the community. As well as cutting the interest rates, the Fed has also begun to increase its lending to financial institutions to help ease the credit crunch, but once everything really started heading downhill there reserve started to run low. Thus, as a result, the central bank started printing money. Doing this has allowed them to help out corporations with their debt, increased the lending the Fed does to banks, and the recent bailouts of struggling institutions. However, with this comes inflation, and when the stock market does start to kick again the people who invested will no longer be happy with the low rate of return.

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