Happy Birthday Federal Reserve

How Fed's pullback of stimulus could affect you

By Paul Wiseman THE ASSOCIATED PRESS

Traders John Doyle, left, and Michael Smyth confer Thursday on the floor of the New York Stock Exchange. (THE ASSOCIATED PRESS)

WASHINGTON — Consumers will likely pay more for home loans. Savers may earn a few more dollars on CDs and Treasury bonds. Banks could profit. Investors may get squeezed.

The Federal Reserve's move Wednesday to slow its stimulus will ripple through the global economy. But exactly how it will affect people and businesses depends on who you are.

The drop in the Fed's monthly bond purchases from $85 billion to $75 billion is expected to lead to higher long-term borrowing rates. Which means loan rates could tick up, though no one knows by how much.

The move could also weigh on stock markets from the United States to Asia, although the early response from investors was surprisingly positive.

Just keep in mind: The impact of the Fed's action is hard to predict. It will be blunted by these factors:


•It's a very slight reduction. Economists had expected the Fed's monthly purchases to be cut more than they were.

•While it will buy slightly fewer bonds, the Fed expects to keep its key short-term rate at a record low ''well past'' the time unemployment dips below 6.5 percent from today's 7 percent. Many short-term loans will remain cheap. ''They have tried to sugarcoat the pill,'' says Joseph Gagnon, senior fellow at the Peterson Institute for International Economics.

•The Fed thinks the economy is finally improving consistently. An economy that can sustain its strength can withstand higher borrowing rates.

All of which suggests that while Wednesday's action marked the beginning of the end of ultra-low interest rates, the pain may not be very severe.

The Fed's bond purchases, begun in the fall of 2012, were meant to stimulate the economy. The purchases were designed to lower mortgage and other loan rates, lead investors to shift out of low-yielding bonds and into stocks and prod consumers and businesses to borrow and spend.

Here's a look at the likely effects of the Fed's decision:

loans

Mortgage rates have already risen in anticipation of reduced Fed bond purchases: The average on a 30-year U.S. fixed-rate mortgage has increased a full percentage point this year to 4.47 percent. Analysts say it will likely head higher now.

''Homebuyers aren't going to be happy,'' says Ellen Haberle, an economist at online real-estate brokerage Redfin. ''In the weeks ahead, mortgage rates are likely to reach or exceed 5 percent.''

An improving economy means stronger sales for businesses, but they, too, may have to pay more for loans. Auto, student and credit card loan rates are unlikely to change much. They're tied to the short-term rates the Fed is leaving alone.

Savers

Savers have suffered from the Fed's low-interest rate policy. Wednesday's move could offer some relief to people who keep money in three- and four-year CDs. But it probably won't mean a big jump from, say, the average 0.48 percent rate on 3-year CDs.

''They're starting from such a low point, it's not going to be nearly enough to make three- and four-year CDs anywhere near compelling,'' McBride says.

By keeping short-term rates near zero, the Fed move does nothing for people with money in savings accounts and very short-term CDs.

Banks

Banks earn money from the difference between the short-term rates they pay depositors and the longer-term rates they charge consumers and businesses. The gap reached a five-year low earlier this year. But it's likely to widen as longer-term rates rise and short-term rates stay fixed. Bank profits should rise as a result.

Financial markets

The Fed intended its bond purchases, in part, to push bond yields so low that investors would move money into stocks, thereby driving up share prices. Since mid-November 2012, the Dow Jones industrial average has surged 28 percent.

Many Wall Street analysts feared stocks would plummet once the Fed announced a pullback in its bond buying. On Wednesday, the opposite occurred: The Dow rocketed 293 points. Investors appeared to focus more on the good news (the economy is improving) than the bad (the easy-money days may be ending).

''As the tapering continues, there will be less liquidity going into the stock market,'' and the rally will either slow or end entirely, says Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.

Emerging markets

Over the past year, the super-low U.S. rates had led investors to seek higher-yielding investments in emerging markets. Last summer and fall, speculation about a slowdown in the Fed's stimulus sent stocks tumbling in the developing world.

Indonesia's market has sunk nearly 19 percent since investors began anticipating the Fed move in May. Stocks in Thailand are down 18 percent. Without Fed policy driving cash into developing markets, these stock markets might have further to fall. 

************************************************

Happy Birthday Federal Reserve

December 23, 2013 will be the 100^th anniversary of the Federal Reserve System. With the 100^th anniversary right around the corner, Chairman Ben Bernanke should be making preparations for a large celebration… by printing more money.

The Federal Reserve Act was enacted on December 23, 1913 and signed into Law by President Woodrow Wilson. The three main objectives of the Federal Reserve Act are:

Maximum employment

Stable prices

Moderate long-term interest rates

The Federal Reserve is a central bank whose policy does NOT need to be approved by the president or anyone else in the executive or legislative branches. The Federal Reserve serves the interests of the general public and private bankers. Hmmm. Let me repeat that:

The Federal Reserve serves the interests of the general public and private bankers.

How does that work out for the general public?

A little history from our friends at Wikipedia:

In 1816, however, Madison revived it in the form of the Second Bank of the United States. Years later, early renewal of the bank's charter became the primary issue in the reelection of President Andrew Jackson. After Jackson, who was opposed to the central bank, was reelected, he pulled the government's funds out of the bank. Nicholas Biddle, President of the Second Bank of the United States, responded by contracting the money supply to pressure Jackson to renew the bank's charter forcing the country into a recession, which the bank blamed on Jackson's policies^{[citation needed]}. Interestingly, Jackson is the only President to completely pay off the national debt. The bank's charter was not renewed in 1836. From 1837 to 1862, in the Free Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank panics, in 1873, 1893, and 1907,[5][6][7] provided strong demand for the creation of a centralized banking system.

http://en.wikipedia.org/wiki/Federal_Reserve_System

Or if you prefer

History of the Federal Reserve

One option to fund the 100^th Anniversary party of the Federal Reserve System is for the Federal Reserve to institute another quantitative easing. If an organization like the Federal Reserve has failed to meet its objectives (maximum employment, stable prices, and moderate long-term interest rates) in a century, should it continue to exist?

My opinions…supported by FACTS ! !

Julie Farrell