Wednesday, June 22, 2011

Steady as She Goes

We all have those moments: we just want to do what we need to do to make it through the day (is it time to go home yet?).  And for most of us our days follow a pretty steady (some might say “boring”) routine.  We get up, go to work, run errands, babysit (parent), make dinner (following the new USDA “food plate” rules of course) and if there is any time left we may try to do something for ourselves (like go to the gym, or go to the gym through osmosis of watching other people workout on TV).  This is what people like to call “work-life balance.”  Really our objective is to try to keep a happy balance in our lives of getting everything we need to get done done and also have some fun time leftover.  

In other words, most of us avoid making waves in maintaining our daily life balance.  Sure there are “bumps”: we all dabble in the occasional “friendly” gossip (ever time how fast a rumor gets around the office?), or we may get angry and have some choice words for our fellow citizens who have driving issues or work in customer service.  We may also love reading about mud-slinging between “frenemies” (Paris v. Kim, T.O. v. everyone).  Even political figures make the cut (Bristol Palin wrote a “memoir” slamming Meghan McCain as a “snobby whiner,” this could turn into a chick fight).  But underneath all that we are peace-loving people right?  

Our economy acts in a similar way – it stays on a steady course with some bumps along the way.  These bumps can be good or bad (the latest "bump" was bad).  And just like how we try to keep a happy balance in our lives, the Federal Reserve (the bank of the U.S. Government) has the job of keeping a happy balance in the economy.  That is a tall order; we have a hard enough time keeping our own lives moving forward at a happy, steady rate let alone worry about 300 million other people.   There are a lot of us who are still feeling the pinch from the 2008-09 recession, especially in the jobs department (our average hourly wages, after adjusting for price increases, went down over the last year by 1.6%).  But getting us all back on track is exactly what the Fed is trying to do.  How?  Through a couple of different ways, and this is what we hear about on the news.  One of our problems has been getting loans, as individuals and as businesses to have money to pay for the stuff we need or stay in/grow business.  So, the Fed has been “injecting” money (aka “liquidity”) into banks and businesses (called “quantitative easing”).  The Fed has done this twice (the second time dubbed “QE2” for short) and will end that at the end of the month.

The main way the Fed is trying to get the economy back in balance is through a special short-term interest rate (called the “Fed Funds Rate,” that is the cost for banks to borrow money held by the U.S. Government).  Again the point of influencing interest rates is to influence how much extra money is in the economy (“money supply”).  The key here is that the interest rate set by the Fed filters down into the interest rates we see at the bank (a controversial assumption).  So, the idea is that when interest rates are low, people have less incentive to save and more incentive to spend, generating economic growth.  Similarly (as we know from the mid-2000’s) low interest rates can make it more affordable for people and companies to borrow money, also encouraging spending.  Too much extra money can increase prices (“inflation”) because of the increase in our spending, so there is a delicate balance.  Right now the Fed wants the economy to grow, to encourage spending, to get companies to hire more people, and to get our housing prices back on track.  So it is no surprise that the Fed decided today to keep the interest rate (the Fed Funds Rate) at its historic low, between 0-0.25%, and the Fed intends to keep rates this low for an “extended period.”  Steady as she goes, the rate has been this low since December 2008.  

The hope is that these low rates will trickle down to helping us, the country, restore balance by providing the appropriate environment that will enable us to work, eat, and live in our happy, steady, balanced way.  However, it’s taking a bit longer than anticipated (the bump is in fact a hump), and just like we sometimes take a step back to re-examine our relationships in times of stress so too may the Fed.  Perhaps the Fed should invest in Yoga.

(The Federal Reserve, Bureau of Labor Statistics)

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