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A recent article from Reuters states that “the U.S. Federal Reserve is expected to slash interest rates by as much as a whole percentage point at its policy meeting on Tuesday.” Currently this rate is at 3% and the cut would lower it down to 2%. This is yet another bold move by the federal reserve in an attempt to prevent a recession in the U.S. economy. Since September, “the Fed has cut overnight rates by 2.25 percentage points.”

If Bernanke goes ahead with this 1% cut that is rumored, he is not giving himself a whole lot of wiggle room for later. Once the rate is down to zero, he can’t exactly go into the negative numbers. If I were him I would have taken a more gradual step-down approach instead of these large cuts. Personally I believe that large cuts and hikes tend to scare the markets. People like to be able to predict the future. Remember when Greenspan had his usual .25% hike every meeting? The markets loved that. They knew exactly what was going to happen each time there was a meeting. There were not a whole lot of surprises. It seems like now every time there is a Fed meeting there is a large speculation over what is going to happen. I don’t think that this is a good thing for the health of the market.

This photo was obtained from the following site

Consumers can feel the effects of Bernanke’s cuts though. I had a money market account with VirtualBank that was paying 4.65% no more than 6 months ago. Now it is paying only 3%. CD rates at the credit union that I work at have dropped steadily as well. If I remember, a CD was about 5.05% only about five months ago. Now I believe it is paying 3.65%. Every day I hear grumblings from the CD savers who rely on CD rates as a main source of their income. Many complain that if rates continue to drop they will not have the interest income that they need to sustain their lifestyle.

If this cut were to be 1% as predicted, it would be the “biggest rate cut since 1982.” If anyone remembers correctly, 1982 was a time of rampant inflation and economic uncertainty. Hopefully we will not end up in the same boat. According to the article, “the Fed is expected to announce its decision around 2:15 p.m. EDT.” This will be right in the middle of the trading day. I predict that the cut will go through as predicted. I also predict that the markets will be down tomorrow, as people are starting to lose faith that rate cuts are a viable solution to our current economic dilemma.

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It has yet to be released to the public, but was anyone aware that there was a new $5 bill in the works. Technically we should have, because the Federal Reserve first announced the new bill to the public on September 20th, 2007. I actually just found out today from a fellow co-worker. Apparently this bill has been in the works for a long time though. According to the press release by the Fed, “because the $5 bill is heavily used in vending and transit farecard machines, the U.S. government began informing the manufacturers and end-users of those machines about the upcoming new $5 bill more than a year ago, to provide ample time to adjust them to accept the new design.”

If anyone has seen the new bill, they will see right away that it is a fairly large change from the past bill. It even seems to have a bit more going on in it than the new $50, $20, or $10 do. The main reason for the redesign of the $5 was because counterfeiters were bleaching the $5 bill, and then reprinting it to look like the $100 bill. Because the security thread and the watermarks were in roughly the same spot and looked similar at a quick glance, it was easy for counterfeiters to accomplish this.

Here is a great site that gives you a more in depth look at what the new $5 bill will look like, as well as some of the security features that go along with it.

Here is a quick rundown of some of the new security features of the new bill. All of the images were taken from the above mentioned site.

This picture shows some of the new watermarks on the new $5. Notice the number 5 rather than a watermark of the President.

The new security thread will be located on the right hand side of Lincoln’s portrait, instead of on the left hand side where it previously was before.

Notice that on this new bill there is no oval outline of Lincoln like before.

Here we have what the Fed calls the “symbols of freedom.” These refer to the stars and the eagle which will be adorning the background of the bill.

Here is how the new serial number will look. As you can see, it is roughly the same, but will be aligned on the bill slightly differently.

Microprinting on the bill will make it harder for scanners to accurately recreate the design of the bill.

Here are the federal reserve indicators. The G refers to the fed that the bill was issued from.

Here is a unique a potentially controversial new feature for the $5 that other newer bills do not have. The exceptionally large purple five on the back corner of the bill was created for the visually impaired so that they can more accurately see what the value of the bill is. Personally, I think it looks a bit odd and out of place, but I can definitely see how it would help out someone with poor vision.

The $100 bill is slated to be the next US bill to have a redesign.

Don’t go throwing out your old $5 bills just quite yet! There is also no need to bring them into your local bank to exchange them out for new ones. They will still work just as good as they did before.

Here is a little known fact that comes from the previous web site. Did you know that “every U.S. banknote issued since 1861 is still redeemable today at full face value and will continue to be legal currency.” So go ahead and toss those fives back under your mattress. You can pull them back out in 2050 and they will be just as good as they are today!

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After being in the toilet for the past six months or so, the banking sector is starting to show a little promise again. After months of watching banks write off bad debts, investors are starting to show some hope for our financial institutions. This newfound hope and optimism can’t be attributed to the vision of bank CEO’s. Bank executives just received a temporary bailout from their new best friend Ben Bernanke at the Federal Reserve. Although it is not the job of the Fed to bail out banks from their poor decisions, it is their responsibility to ensure that the economy keeps running smoothly. When thousands of banks around the country all follow each other’s lead like a bunch of lemmings and made poor loans we suddenly have a large problem on our hands. When banks start to do bad people worry. Just the other day an older gentleman came into our credit union and asked to liquidate his entire account into cash. It came out to about $64,000. He also insisted that each bill be marked with a counterfeit pen to ensure that he was getting real currency. Obviously these actions come from someone who has lived through the depression, but if you get enough people acting irrationally like this because they feel their money is in jeopardy, then suddenly the banks will start to face some real problems.

So what exactly are the responsibilities of the Federal Reserve you may ask?

Taken straight from the Federal Reserve’s Web Site:

“Today, the Federal Reserve’s responsibilities fall into four general areas:

• conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices
• supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
• maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
• providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation’s payments systems.”

If they don’t take care of the majority of the banks, then they are not taking care of their responsibilities. So what have they done exactly to take care of the banks? On January 22nd, 2008 they came out with a surprise announcement that they would be cutting the federal funds rate by 75 basis points (1% =100 basis points) from 4.25% to 3.5%. The federal funds rate is the rate that banks make overnight loans to each other. The market for loans and savings products typically follows the movement of the federal funds rate. Since they lowered the rates, this means that mortgage rates will drop and savings products like money market accounts and CDs will drop as well.

The Federal Reserve states that “while strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”

Let’s examine what effects this rate cut will have.

Lower rates decrease the cost of borrowing funds. A borrower can save a ton of money by borrowing at 5% instead of 7%. This means that many businesses will take advantage of the lower rates to borrow money to expand their operations. With expanded operations, they will likely need more employees to run this new operation. This satisfies the Fed’s first responsibility of “pursuing full employment.”

Mortgage rate will drop and with that comes a wave of refinancing. Many people got in on the real estate boom with loans they didn’t fully understand and weren’t fully qualified for. You can blame both parties for this problem. Lenders should have fully explained the drawbacks of the loans they were putting people into. When borrowers low introductory payments reset to higher levels, many homeowners were shocked to find that their monthly mortgage payment had almost doubled. According to an article in the Boston Globe “a record $375 billion of subprime loans reset to higher payments in 2007 and another $340 billion will reset this year.” The lower rates could be able help qualified credit borrowers refinance their loans to a lower fixed payment that they might have a higher probability of affording. Another option that troubled borrowers may have is selling their home to pay off the mortgage and either move into a cheaper home or rent. According to the National Association of Realtors, “the median price of an existing single-family home dropped 1.8 percent in 2007.”  In many markets this figure is much lower, meaning that the sale of the home is not enough to cover the outstanding balance on the mortgage. This sad reality is what has led to the 75% increase in foreclosures in 2007.

Savings rates will drop. According to Bankrate.com, the national average for 1 year CDs is a measly 3.66%, down from last week’s 4.12% average. This has a very negative effect on those using CDs and other safe investment products for income. If inflation is at 3% you are hardly making any real gains in your net worth. You are just maintaining your purchasing power. When rates are low, savers tend to take their money out of CDs and money market accounts and put them into the stock market or mutual funds where they can make a better return. This could explain why the Dow Jones Industrial Average has increased from a low of 11,508.74 on January 22nd to a closing price of 12,480.30 on January 29th. That is an 8.4% return for one week. That sure beats 3.66% for an entire year!

The Fed also stated in their January 22nd announcement that “appreciable downside risks to growth remain.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.” This statement is referring to the January 29th and 30th meetings that the Fed in having. In this meeting they will be deciding whether or not their 75 basis point rate cut was sufficient. We should be expecting an announcement sometime on the 30th. Bank stocks and the stock market in general should react inversely to the decision made by the Fed.

In conclusion, I think that the Fed will go ahead and cut rates another 25 basis points. If this cut is made it will probably be the last for a long time and should help to restore some faith and stability to the financial sector. I think a 25 basis point rate cut is necessary for the psychology and mindset of investors. It should be interesting to see how this all plays out over the coming months.

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Just the other day the Federal Reserve decided to drop interest rates by 75 basis points. This surprise rate cut came as a response to the large dip in world markets while the US markets were closed for Martin Luther King Day. The rate cut also comes at a convenient time for banks trying to sort out their subprime situation. Many subprime borrowers were enticed into taking out loans with low initial monthly payments. When their rates adjusted their loan payments doubled in some cases. This has caused many financial institutions to write off millions and billions of dollars of bad debts. The rate cut was intended to help out many of those institutions that are in dire need of assistance.

There has been such a big deal made of this rate cut because it was unexpected. Typically rate changes are announced during one of the Fed’s planned meetings. This one occurred out of the blue. The Fed will be meeting again on January 29th and 30th. Many analysts expect that the Fed will cut rates once again to help out our struggling economy.

These rate cuts should help to stimulate our economy because they appear to help out more people than they hurt. With lower rates, subprime borrowers should see the monthly payments on their adjustable loans drop. This should help to slow down the number of foreclosures. With these rate cuts loan refinancing should become big again. Lower rates will also make the cost of owning a home less for buyers, so the housing market should start to turn around as well.

Rate cuts do have a negative impact on some people. Many retired people rely mainly on fixed income securities like CDs to provide them money to live off of. As rates decrease, their interest earned on these CDs decreases as well.

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