Federal Reserve not planning to reign in credit supply yet

Federal Reserve Vice Chair Janet Yellen

Federal Reserve Vice Chair Janet Yellen has confirmed the Federal Reserve isn't going to tighten the credit supply just yet. Image from Wikimedia Commons.

The Federal Reserve has announced that it won’t be tightening the national credit supply just yet. The Federal Reserve has certain controls over the amount of available lending capital in the financial system. Fears of inflation have caused some to think the credit supply needs to be tightened, but the Fed does not think that is currently prudent.

Fed says economy is too shaky to tighten credit

Prices of consumer goods, such as food and gasoline, have begun rising recently, causing many to worry about economic inflation. This has prompted lawmakers and finance industry insiders to question whether the Federal Reserve, the key institution in setting monetary policy and controlling things like inflation, should start restricting the available credit supply. Members of the Fed, however, are convinced that the overall economy is too shaky to tighten the credit supply, according to MSNBC. At a recent speaking engagement at Yale University, Fed Vice Chair Janet Yellen said that conditions weren’t right, but the central bank would be easing off its current policy of keeping interest rates at near zero.

Unemployment too high

The Fed partially controls the supply of available credit funding for the banking system of the United States and influences the interest rates that banks charge. During a recessionary period, the Fed can lend short term loans to banks at zero or close to zero percent interest to stimulate lending. Those banks can lend that capital to consumers, as mortgages or personal loans, or to other financial institutions. There are, of course, many other facets to the Federal Reserve’s operations, but credit supply is a key function. Alternately, the Fed can cut back on the amount of available capital if it thinks price inflation is making the nation’s currency worth less than it should be. The price of commodities like oil and food is increasing, which means that $1 doesn’t go as far.

Banks also have CFPB to worry about

The Federal Reserve is going to eventually restrict the supply of credit, meaning interest rates on loans will start increasing in the next year or so, once the central bank feels confident enough about unemployment and other economic conditions. Banks will also have to follow rules from the new Consumer Financial Protection Bureau, which will levy fines for legal violations. The bureau will start operating in July, and spokesperson Elizabeth Warren has promised the first new regulations set in place by the bureau by January of 2012, according to Reuters. The CFPB is still a hotly debated issue in Congress, so the extent of its reach has yet to be determined, but a greater degree of regulation is soon to set in for the financial system.







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