Yesterday, the U.S. Federal Reserve lowered its target for the federal funds rate (which is the interest rate banks charge each other on overnight loans) to between zero and one-quarter percentage point.
Aside from the Fed’s historic move on interest rates, there were two statements in the Federal Open Market Committee’s statement in Washington yesterday that are of importance to investors. Here are those statements:
“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” In my words, we haven’t seen anything yet in respect to what the Fed has up its sleeve to jump-start the economy.
“Early next year, the Federal Reserve will also implement the Term Asset-backed Securities Loan Facility to facilitate the extension of credit to households and small business.” Again, in my interpretation, the Fed is saying that if the banks don’t start lending to consumers and small businesses, the Fed will get as close as it can to doing just that on its own.
My long-term readers know I was never a fan of Alan Greenspan. I believe Greenspan’s tenure at the Fed was catastrophic in regards to making money so cheap that consumers were lured in to buy houses they could not afford. As for Bernanke, I have the utmost respect for him. Bernanke is a student of the Great Depression and a student of the Japan economic debacle of the 1990s. The Fed could not be in better hands right now.
Ben Bernanke is one determined banker. In my lifetime, I have never seen the Federal Reserve be so proactive in providing liquidity to the financial system. At some point, although it may be months off, all the efforts of the Fed will have the wanted effects on the American economy. It may come at the cost of a sharply lower valued American currency, but the monetary efforts of the Fed, I believe, will eventually trickle through the economy to get the results Ben Bernanke seeks