Fed Rate Held Steady: What Does This Mean for You?

As expected, the Federal Reserve announced today that the federal funds rate will remain unchanged at 5.25%. The Federal Reserve has maintained the current federal funds rate since June 29, 2006 in hopes of slowing the economy. Why would the Federal Reserve want to slow economic growth, since this sounds as though it would be counterintuitive to the goal of maintaining a strong economic market? Well, there are several reasons why the Federal Reserve would want to slow economic growth, not all of which are meant for your direct benefit.

First, the Federal Reserve wants to slow economic growth so that it can reduce the risk of inflation. Widespread inflation would make it relatively more expensive to purchase gas, groceries, and other items, in turn decreasing consumer purchasing power. It appears as though the risk of inflation is decreasing, as the inflation index was down to 2.1% in March (as compared to February's inflation index of 2.4%). However, as gas prices continue to increase, so does the threat of increased inflation levels.

The Federal Reserve also wants to slow economic growth in order to control unemployment rates. In particular, higher interest rates would keep corporations from expanding too rapidly. If corporations grow at a slower pace, then there are fewer jobs created, thus making the unemployment rate increase. While this slower economic growth keeps inflation in check in the long term, in the shorter term it may hurt those who are currently unemployed and seeking work.

Maintaining the current federal funds rate will also impact the housing market, which has seen a recent slump. A decrease in the federal funds rate, which some in the economic markets hope will occur soon, would most likely bring a drop in interest rates, thus encouraging more buyers in the housing market. On the other hand, savers hope that interest rates remain higher so that they can receive a larger return on their investments.

What we can expect the Federal Reserve to do in the future is still unclear. The message from today's Federal Reserve meeting was that the Fed plans to continue to monitor the economic environment (especially gas prices) to determine whether or not inflation will become an issue to the United States economy. In any case, today's decision to maintain federal reserve rate levels may or may not directly benefit you, especially if you are looking for a job or intend to buy a home in the near future.

C.M. Paulson is a freelance writer based in Pittsburgh, PA. In addition to receiving her MBA from the University of Pittsburgh's Katz School of Business, Ms. Paulson worked for almost ten years for two Fortune 100 companies in a variety of analytical and management roles.

Source: AP, CNBC