Here Comes the Fed: Are You Ready?
Tomorrow the Fed answers the $64,000 question (or is it $64,000,000? I forget): Will they or won't they raise rates? What rates you ask? The Fed Funds rate. What's that, you ask? Let's go with the definition provided by Wikipedia. (You CLICK HERE to read all about it.) It's the interest rate
Enough of the technical stuff.
Tomorrow's the day of reckoning in the minds of many. It's been talked about for months. The mere talking has jolted markets this way and that. Tomes have been written about whether a rise in rates will sink the stock market. (The answer is - naturally - "yes" and "no".) But whatever they Fed does tomorrow, the very idea that so many people and institutions are focused on the Fed should remind us that our financial system really needs a break. Like those upper crust Europeans who used to (and still do) "take the waters" to restore their health, the Fed needs to be drenched in some of those mineral waters to restore some semblance of financial health to our country.
If you remember, the financial tsunami that swept over us in 2007-2008 caused the Fed, in its wisdom, to drag the Fed Funds rate down from a bit over 5% to effectively zero where it has languished ever since. The result has been that none of us can get a safe return on our hard-earned money, and retirees can't safely generate income to meet living expenses. The "magic of compounding" which once took safe returns on short-term treasury bills and notes and increased your wealth to the extent you let interest rates compound your principle was gelded.
The flip side of the coin was that banks could take deposits, pay nothing, and lend for more than nothing, earning a safe profit. This bolstered their financial standing, which suffered greatly in 2008 as a result of poor investment decisions (subprime mortgages, liar loans, derivative origination and trading, etc.) Powerful institutions and individuals have been able to borrow money at essentially zero percent and leverage their investments to increase their profits on a virtually guaranteed basis.
So regular folks got the short end of the Fed stick, while the privileged and powerful prospered. (And you don't have to be a communist or a socialist to see it and say it.)
But what about tomorrow? Will all be rectified by a virtuous raising of interest rates over time, restoring our great Republic to a more sane and just financial equilibrium that shares the wealth in the manner espoused by proponents of the free market - a market we haven't seen since at least 2008? Actually no one really expects that.
All expectations point to a minimal rise, if anything. Some believe that will be followed by subsequent increases. While that's always possible, it assumes continued positive U.S. economic data, a questionable assumption. And even if such data ensues, raising rates could quash any alleged recovery, an unwanted outcome.
There is, however, one certain result we might reasonably expect, whichever way the Fed turns: more of the same. The financial system will chug along jerked this way and that by Fed decisions or lack thereof. Largely intact, its tilt towards those who already have and away from those who work, save, and would like to have more will continue unabated.
As far as your being ready or not, what ever your preparation, be prepared as well for more of the same.
...at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets.Actually, the Fed sets what is called the "federal funds target rate." The actual rate is negotiated between banks. But at the end of the day, the Fed manipulates the money supply such that the negotiated rate will be what they want it to be. So they effectively set the rate itself.
Enough of the technical stuff.
Tomorrow's the day of reckoning in the minds of many. It's been talked about for months. The mere talking has jolted markets this way and that. Tomes have been written about whether a rise in rates will sink the stock market. (The answer is - naturally - "yes" and "no".) But whatever they Fed does tomorrow, the very idea that so many people and institutions are focused on the Fed should remind us that our financial system really needs a break. Like those upper crust Europeans who used to (and still do) "take the waters" to restore their health, the Fed needs to be drenched in some of those mineral waters to restore some semblance of financial health to our country.
If you remember, the financial tsunami that swept over us in 2007-2008 caused the Fed, in its wisdom, to drag the Fed Funds rate down from a bit over 5% to effectively zero where it has languished ever since. The result has been that none of us can get a safe return on our hard-earned money, and retirees can't safely generate income to meet living expenses. The "magic of compounding" which once took safe returns on short-term treasury bills and notes and increased your wealth to the extent you let interest rates compound your principle was gelded.
The flip side of the coin was that banks could take deposits, pay nothing, and lend for more than nothing, earning a safe profit. This bolstered their financial standing, which suffered greatly in 2008 as a result of poor investment decisions (subprime mortgages, liar loans, derivative origination and trading, etc.) Powerful institutions and individuals have been able to borrow money at essentially zero percent and leverage their investments to increase their profits on a virtually guaranteed basis.
So regular folks got the short end of the Fed stick, while the privileged and powerful prospered. (And you don't have to be a communist or a socialist to see it and say it.)
But what about tomorrow? Will all be rectified by a virtuous raising of interest rates over time, restoring our great Republic to a more sane and just financial equilibrium that shares the wealth in the manner espoused by proponents of the free market - a market we haven't seen since at least 2008? Actually no one really expects that.
All expectations point to a minimal rise, if anything. Some believe that will be followed by subsequent increases. While that's always possible, it assumes continued positive U.S. economic data, a questionable assumption. And even if such data ensues, raising rates could quash any alleged recovery, an unwanted outcome.
There is, however, one certain result we might reasonably expect, whichever way the Fed turns: more of the same. The financial system will chug along jerked this way and that by Fed decisions or lack thereof. Largely intact, its tilt towards those who already have and away from those who work, save, and would like to have more will continue unabated.
As far as your being ready or not, what ever your preparation, be prepared as well for more of the same.
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