Yesterday, April 30th, the Federal Reserve cut its key interest rate by a quarter percentage point, however the central bank also hinted that this latest rate cut may be the last one for a while.
The cut reduced the fed funds rate, which is the key overnight rate at which the banks loan money to each other, down to 2%. It was 5.25% in September 2007, when the Fed began its rate reductions in response to the downturn in the economy.
The fed funds rate is the benchmark for home equity loans, credit cards and other consumer loans as well as for prime rate loans used for short-term business lines of credit.
In the statement issued by the fed, the phrase "uncertianty about the inflation outlook remains high" led many to believe that should the latest reduction, combined with previous cuts have its intended effect, the new emphasis at the fed would be to fight inflation. If the economy does recover, inflation in a low interest rate environment is a very likely scenario and at that point we could interest rate increases. A number of economists are predicting that this may be exactly the case in 2009. Some blame the fed, in part, for the inflationary situation we currently have with commodity prices - food, oil, etc. These critics say that this has directly contributed to the rapid rise in prices consumers and businesses are having to absorb.
While there could be more rate cuts, the fed believes that, given where the economy is currently at, they have done enough rate reductions to assist the economy to rebound. The fed is scheduled to meet again the third week of June and will consider any changes in monetary policy at that time.
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