The scariest man on the planet until 2:30 p.m. (EDT)...
Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve
On this Halloween day, Ben Bernanke will be roundly condemned by a number of people who felt that the FOMC decision is wrong. Especially if they did not anticipate the results and take the appropriate action for their institutions or personal accounts.
So this Halloween, we present the scariest man on the planet... at least until the announcement of the FOMC's decision is issued at approximately 2:30 p.m. (EDT).
By way of background...
Who: The FOMC...
"The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee's assessment of the economy and policy options."
What they do: Monetary Policy...
The Federal Reserve is our nation's "Central Bank" and is charged with "influencing the availability and cost of money and credit to help promote national economic goals."
More specifically, they are the watchdogs that keep our economy growing, promote full employment and control conditions that reduce a consumer's purchasing power by minimizing inflation.
How they do it:
Contrary to popular opinion, it is not magic and its not done in complete secrecy.
"The Federal Reserve controls the three tools of monetary policy--open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight."
Why it matters...
"Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services."
Why it matters to YOU...
If your credit card interest rate is pegged to the PRIME interest rate, the rate charged by banks to their most creditworthy customers, your credit card interest rate may be affected when the FOMC changes the federal funds rate. The same with the rates on your car loan, business loans and mortgage if they are pegged to interest rates affected by the FOMC decision.
Will it help those with re-setting ARM loans?
If a person's adjustable rate loan (ARM) is resetting, the change in the interest rate may be overshadowed by another more significant event. For the fixed portion of the ARM loan period, especially for those who took advantage of so-called "teaser rates," the monthly loan payments were manageable. However, when a loan resets, the new monthly payment is calculated to fully pay off the loan in the remaining period of the loan. Monthly payments can rise dramatically and overtax the borrower's ability to pay. Should a borrower fail to pay their mortgage obligation -- the result is foreclosure.
So what's the big deal?
Normally the stock, bond and commodities markets will arrive at the same conclusion as the FOMC prior to the FOMC meeting -- based on the same commonly available data about the money supply and markets that is used by the FOMC in setting policy.
However, when the FOMC decision is unexpected, the market may experience an almost immediate and sometimes extreme reaction: moving sharply up or down on the FOMC news. If the news is perceived as being "good" for the market, stocks will rise after the announcement. Betting on this rise is gambling, not investing.
Will a rate change solve the country's economic problems?
The short answer: NO! However, other Fed actions involving depository institutions may help ease the fear, uncertainty and doubt that prevents financial institutions from making new loans and restores a degree of liquidity into the marketplace. Especially when Fed rule-making curtails many of the abuses that sparked this latest systemic problem. In and of itself, the rate cut will do more to restore confidence in the U.S. economic outlook than directly affect what investors will actually do.
What can YOU do?
If possible, seek professional assistance in preserving and growing your assets.
Ladder your investments with staggered maturities so that you can take advantage of rising rates and reduce the impact of declining rates.
Balance your investments among many asset classes so you profit from significant upward moves and shelter against sharp downward moves.
Invest in your own financial education so you are no longer at the mercy of a fancy-titled "salesman" whose only goal is to increase their earnings by "churning and burning" your account.
Need we mention... purchase that which you can comfortably afford and build a contingency fund to allow you to ride through hard times.
Believe in the Better Business Bureau slogan, "Investigate Before You Invest."
Drive carefully and watch for kids popping up in unexpected places. Do not overindulge. Have a happy and safe Halloween.
A reminder from OneCitizenSpeaking.com: a large improvement can result from a small change…
The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius
“Nullius in verba.”-- take nobody's word for it!
“Beware of false knowledge; it is more dangerous than ignorance.”-- George Bernard Shaw
“Progressive, liberal, Socialist, Marxist, Democratic Socialist -- they are all COMMUNISTS.”
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS "The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius “A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell “Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar “Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS
"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius
“A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell
“Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar
“Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS