The Federal Reserve is changing its policy with regards to how it quickly it responds to inflation. Historically, once inflation reached increased by about 2%, the Feds would raise interest rates. Now, in an effort to support the economy, the central bank is pushing the threshold of inflation beyond the 2% target.
This change, according to an article published by CNBC.com, is a way for the Fed to encourage spending by allowing Americans to continue to borrow money at low rates. According to professor of Finance and Economics, Laura Veldkamp, “This is meant as a stimulus, as a way of getting people to spend more.”
By allowing rates to stay lower for a longer period of time, many lenders can pass the low rates on to their consumers. For example, credit card rates have fallen to 16% on average, personal loans are reporting rates as low as 12.07% and HELOCs have rates below 5%.
As reported in the article, the downside to the change in policy is the effect increased inflation will have on long term bond prices. The chief financial advisor for Bank Rate, Greg McBride states that these longer term bonds will be more prone to large price declines. Yet, ““With low inflation the Fed’s focus now, that’s a concern for another day…”
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