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May 7
Have interest rates bottomed out? What should the Fed do?

When the Fed moved to lower interest rates last week it took the fed funds rate down to 2.00%. Around the internet and all across business televisions most guests and most bloggers had proclaimed this the end of the Fed's interest rate cuts. Since 1994 when the Fed began announcing its intended fed funds rate rates have only been this low one other time, and that was in the period just after September 11th, 2001. ben%20bernanke.jpg

Let's put into perspective just how much rates have gone down and how fast they have done so. As of January 21st of this year the fed funds rate was at 4.25%. Here we are, not even four months later, and the rate is not down to 2%. There have been some complain about the Fed being behind the curve in lowering interest rates. The FOMC may have been a tick slow in easing rates to start with, but once they saw the economic problems no one can deny the fact that they acted very aggressively. In fact, twice in the span of two months the Fed lowered interest rates by 75 basis points at a time, which is extremely rare.

So with the fed funds rate at 2% will the Fed move to lower rates again anytime soon or will this be the lowest we go? My guess would be that rates have hit the lowest they will be in quite a while unless the American consumer implodes. The FOMC will have to be careful with inflationary pressures with interest rates so low, the dollar being so weak, and all the commodities booming across the board. At some point it seems that the price inflation that consumers have been seeing all over the place will hurt the overall economy through significant inflationary pressures.

There are lots of wise guys out there who like to bash the Fed and critique every move they make and every statement that comes out their mouth, but the fact is they have a very difficult job right now. They are trying to balance the significant recessionary pressures and the significant inflationary pressures all at once. I believe the FOMC was right to lower rates aggressively, but they should think twice before moving them any lower because inflation could be right around the corner.


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