|Copyright 2014 by Virgo Publishing.|
|By: Teri L. Lanza|
|Posted on: 11/01/2004|
It seems everyone I know is refinancing their home these days. They want to get in on the goods before interest rates—as rumored—head north again. In self-storage, too, owners are being encouraged to take advantage of low rates before the train leaves the station.
Now … Watch the pretty pendulum … That’s it… Back and forth … You are getting very sleepy…
In September, researchers at the U.S. central bank concluded that the “unusual strategy” used last year by the Federal Reserve to strengthen the economy was a huge success. Led by Fed Governor Ben Bernanke, the study claims the bank controlled interest rates, not by cutting them, but by simply promising to keep the short-term federal funds rate low for a “considerable period.” The influence, it is said, was five times stronger than actual interest-rate changes have proved to be.
By July 2003, the Fed had dropped the federal funds rate to a 45-year low of 1 percent, but that failed to produce what could be considered a “sustainable” economic recovery. So policymakers decided to stop lowering interest rates and instead make public statements about how it might change interest rates in the future.
They call it “policymaking by thesaurus.” But in essence, they played a game of mind management. The Fed’s Open Market Committee made a promise of maintaining a certain policy, then finessed its language over time to change the pledge’s meaning. In their study, Bernanke and his co-authors, Vincent Reinhart and Brian Sack, assert that the Fed’s ability to guide the economy depends more on what it says than what it actually does where interest rates are concerned. Moreover, the effects seem to be farther-reaching. Says Reinhart: “Shaping investor expectations through communication does appear to be a viable strategy.”
How does the Fed justify its tactics? According to the study, its approach “reduced the volatility” of the public’s expectations in regard to Fed policy, which allowed investors to make more accurate speculations about interest-rate changes. In short, it let them test the water.
This issue is about finance: “types” of money, where to find it, how to get it, the best way to ask for it, etc. Several articles make statements about the condition of the economy and status of interest rates. Some make assertions or offer advice pertaining to action. I’m not suggesting you disregard their counsel—now may well be the time to seek out that construction, bridge or permanent loan. My caution is to do so because you’ve done the proper research and determined the best strategy for your particular business, and not because of urging in the industry, the media or public opinion. You don’t want to be a money zombie, do you?
Now, when I snap my fingers, you will awake, turn the page and read this issue voraciously. (Hey, if the Fed can use the power of suggestion to control the economy, surely I can create enraptured readers!)