August 5, 2008
The Federal Reserve voted today to maintain the federal funds lending rate, the "prime rate" from which most interest rates are indexed, at 2 percent. The Federal Reserve's Board of Governors said that the primary reason for keeping the interest rate steady was " Tight credit conditions, the ongoing housing contraction, and elevated energy prices."
"[L]abor markets have softened further and financial markets remain under considerable stress," the Fed said in its statement accompanying the vote. "Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth."
The governors voted 10-1 to keep the rate steady, including newly sworn-in member Elizabeth Duke, former executive vice-president and chief operating officer of Virginia's TowneBank. The sole dissenter was Richard Fisher, who voted for an increase in the federal funds rate.
Lenders index their own rates to the federal funds rate as a benchmark. The average lending rate is usually the "prime" rate plus anywhere from three to five points, so changes in the federal funds rate can impact lending rates for mortgages, credit cards, car loans, and a host of other loans.
Lower rates are generally perceived to be good for consumers, as it encourages more spending via credit card and applying for low-interest-rate loans. Savers tend to bear the worst of rate cuts, as the percentage rate for their investments decreases.
The Fed has shifted their policy view on rate hikes in recent months, favoring lower rates in order to improve the economy rather than containing inflation. But inflation is still on the minds of Fed chairman Ben Bernanke and company, as they "[expect] inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain."
In his early months as Fed chairman after replacing Alan Greenspan, Bernanke's primary focus was "Three Amigos," through a series of interest rate hikes. But a stagnant economy and the crash of the housing market pushed him to moderate his policy and vote for several rate cuts.
Bernanke was also one of the "Three Amigos," along with Securities & Exchange Commission chairman Christopher Cox and Treasury Secretary Henry Paulson, who crafted the plan to backstop Fannie Mae and Freddie Mac through supplying the mortgage giants with taxpayer money to prevent their failure.
President Bush signed the backstop plan into law last month as part of a larger housing bailout package passed by Congress. Critics have charged that the housing plan does little to help individual homeowners, while enabling Wall Street to recover from its mistakes in the housing crisis.
Although prices continue to increase steadily, consumers' wages also posted modest increases in June, combining with the "economic stimulus" rebate checks to give buyers more spending power, in the hopes of strengthening the economy.
