Federal Reserve Chairman Ben Bernanke says that although the federal funds rate will remain low, facilities created by the Federal Reserve to aid the U.S. economy through a recession will be closed.
Bernanke presented his Semiannual Monetary Report to the Congress on Wednesday. The chairman’s statements indicated that the Federal Reserve will continue to, “normalize its lending to commercial banks through the discount window.”
Just last week, the Fed raised its discount rate to 0.75% from 0.50%. This rate is what commercial banks pay to borrow from the Federal Reserve. For individuals and businesses, any change in this rate would affect the interest terms of their loan at signing (Think: Uncle Sam(the Fed) has a soda that costs $1.00, sells it to his big brother(commercial bank) for $1.75, then you(individual or business) agree to buy it for $2.00 and sign on the x).
The chairman testified that on February 1 the Federal Reserve began to close down special liquidity facilities, all of which are scheduled to be closed by the end of June 2010. According to Bernanke, the only program among these facilities that is still operating is the Term Asset-Backed Securities Loan Facility. This facility was created during the deepest slump of the recession as an emergency lending program.
Bernanke did state however that these changes are not indicative of stricter monetary conditions for businesses and households. Instead, says the chairman, the Federal Reserve is acting in response to an improvement in financial markets, however inconsistent certain market gains may be.
For individuals and businesses, this means that staying above deep water in this economy will require a conservative budget. Most gains across financial markets have been modest, and there have yet to be indications that this trend will continue. If these modest gains have been profitable to you, whether the margin be small or not, now would be a great time to add to your nest egg.
See BillShrink for savings and CDs to compare interest rates that banks are offering in your area.
If the Fed continues to tighten lending policy, or so called “normalize” its policies, how do you think this will effect you?