The Federal Reserve on Tuesday cut the federal funds rate ? the interest rate that banks charge each other ? to 2.25 percent, the lowest it has been since late 2004. John Bouman, a professor of economics at Howard Community College and author of two electronic college textbooks on macroeconomics and microeconomics, spoke to The Examiner about the rate cuts.
Why has the Fed made so many rate cuts in such a short period of time?
They?re thinking this possible recession could be a worse recession than we?ve had in the past few decades, because of the subprime mortgage crisis and increasing oil and electric prices. They?re worried and they want to stop the snowball effect.
The Fed wants to make more money available in the financial market so there?s enough to go around so banks can survive.
Also, there?s a psychological effect as well, so people don?t panic and businesses don?t cut production and can continue hiring people.
How do the rate cuts affect consumers?
Anybody who borrows or is likely to borrow money or take out loans will benefit from the rate cuts inthe short term. These are cheaper rates that more people will be able to pay. Credit card rates might be lowered, but those are generally tied to an individual?s personal credit rating.
What?s the downside of the rate cuts?
The way I see the Fed?s intervention is it will stimulate the economy in the short term, but in the long run, we really have to be worried about inflation. It means there?s a lot more money in supply and in a year, we might see higher interest rates.
