Personal Finance Advice

The Federal Reserve lowered the federal funds rate, a key short term interest rate banks charge each other, by a quarter percent to 4.5% this afternoon.  While this was not the 50 basis point cut Wall Street was hoping for, investors still greeted the news warmly, as stock finished the day with modest gains.  The Federal Reserve also cut the discount rate to 5%, the rate that it charges to other banks as the lender of last resort. 

Releasing this statement, the Fed acknowledges it is still concerned with inflation and is monitoring it closely, citing volatility in the energy and commodity prices.  Not surprisingly energy prices rose to an all time high after news of the rate cut was announced.  The beleaguered dollar also reached an all time low against the Euro and most analysts expect this trend to continue.

What does this all mean?  Well, they pretty much told the market this is all your going to get so you had better make the most of it.  Inflationary pressures from the commodity and energy markets will take time to affect the prices of the broader economy but eventually you can expect companies to pass on their higher costs to the consumer.  If inflation starts to rear it’s ugly head, you can expect rate hikes from the Fed in the future even if the housing market continues to slump.

Will this rate cut be enough?  It is difficult to say really.  The housing sector will take time to improve, but the real problem is in the financial markets.  Still weary over losses from the sub prime mortgage market, many institutions have to rethink the way they do business.  Unless a concerted effort is made by them to help forestall rising foreclosure rates, I don’t see the housing crisis ending anytime soon, so the economy could be in for a rough time ahead.