Somebody explain the significance of the Fed not raising interest rates

[Horse with no Name]

It seems that during Clinton's Presidency...it was raised much more frequently than it has been this Presidency.
Why is that and what does it signal for our overall economy?

[tridim]

1. I think it signifies that the economy is stagnant

instead of "robust" as Bush claims.

[nebenaube]

2. shhhh don't complain about it! n/t

[ret5hd]

3. Here's one view:

http://news.goldseek.com/NedSchmidt/1170259380.php

<snip>
Chairman Benanke has some commitment to what is being billed as an innovation in monetary policy, inflation targeting. In this reborn attempt at discretionary monetary policy, a range is established for the future inflation rate. However, no meaningful connection between the money supply and prices is assumed to exist. By some unexplained means, the FOMC will guide interest rates in such a way that inflation will be controlled. Such monetary alchemy may fool the academic community, but it does not fool global financial markets.
</snip>

[Lucky Luciano]

4. The Fed generally raises rates

when the economy has a lot of inflation risk. There was significant loosening for a long time after the internet bubble. With lower rates, business and people can borrow money for less cost and this stimulates the economy. To avoid overstimulation (which leads to inflation), the Fed had to start raising rates - and they did so 17 consecutive times to prevent inflation. Inflation is bad because businesses will have higher capital expenditures to pay out based on money earned when it was worth less. Not good. Not good for the people either obviously. So, there is a fine line to walk for the FED to stimulate the economy without causing inflation.

Oil is a potential big problem, since it can cause inflation that the Fed has little to no control over...this can lead to an unstimulated economy where jobs are lost and there is inflation - a fucking disaster known as stagflation - see the oil crisis of 1973-4.

Hope this helps. Other can chime in hopefully cuz I am tired of typing. :)

[pdrichards114]

5. No. If the economy is stagnant they lower rates,

If the economy is going gangbusters they raise the rate to prevent too much inflation.
In reality nothing sets the rates except the market. The way the fed goes about "setting the rate" is by doing one of two things.

To effectively lower the rates, the Fed pumps the market full of cash. To achieve this they buy bonds and or treasury bills. This floods the market with hard currency which the banks then must do something with. Generally, banks will loan the money in droves, which in turn drives down interest rates.

To raise the rate, the Fed sells bonds and Cd's, and banks become capital "starved." To make up the difference they raise the interest rates on new loans.


Every indicator is saying the economy, as a whole, is doing fine. The people inside the meatgrinder on the other hand...