The Federal Reserve Board meets on Tuesday, and markets are watching with baited breath to see which option they choose. Image: Flickr/Craig Hatfield
The Federal Reserve, the board that sets overnight loan rates for banks, is mulling possible actions to help the economy grow. These changes could be as simple as maintaining course, or as aggressive as risky stimulus moves. Markets around the world have been trading slowly, waiting for the Fed to announce its decision, which is expected late Tuesday.
Federal Reserve option one
The first option in front of the Federal Reserve is the most common – maintaining or dropping interest rates. The interest rates set by the fed are used to determine rates for everything from mortgages to internet loans. By keeping these rates at their current historic lows or dropping them, the Fed would be encouraging the use of credit. The risk, however, is that deflation could stifle whatever gains might be made.
Federal Reserve option two
The second option the Fed has in trying to stimulate the economy is purchasing government debt. The Fed does have some cash on hand to offer a personal cash loan to the government. The mortgage investments that created this income could be turned around to purchase government debt, driving long-term interest rates down. The risk, though, is that this would not stimulate any borrowing.
Federal Reserve option three
The riskiest move, and the one with the most payoff, would be for the Fed to start purchasing securities again. In 2009, the Fed bought more than $1 trillion in securities from Fannie Mae and Freddie Mac. Though this helped encourage lending, Fannie and Freddie are still in trouble. Any large purchase would help guarantee any of this debt and (theoretically) increase the amount of money lent out by businesses. The risk, though, is that this move would be seen as a verification that the economy is in very bad shape, driving investors out of even the best payday loan opportunities.
