A $17 Trillion Cash Infusion Awaits

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Many people don't necessarily fully grasp the purpose for the Fed adjusting rates. Most people understand that when the Fed raises rates, it's to slow down economic growth, and when they lower them it's to spur on more economic growth. But it's a balancing act because too much growth can lead to inflation and too little can lead to deflation. The Fed's goal is to keep inflation levels right around 2%. That's, by all measures, and by most country's standards, the "sweet spot." But the key is not really spending. It's borrowing. When you raise the rate, borrowing slows. When you lower the rate borrowing increases. Rising rates recently, for a while, weren't slowing borrowing to the extent the Fed would have preferred, thus it was making it difficult to get inflation down faster. Granted, while spending is not the key, of course when you can borrow more, and do it cheaply, it's going to significantly increase spending because it affords people more spending power. They'll be more likely to buy houses and cars, or borrow for a vacation. But now it's beginning to show signs of slowing with a recent report out that mortgage refinancing has been in a steady decline and now has declined even further. That's leaving $17 trillion worth of equity on the table. The Fed has to be careful to lower rates down the line considering if rates are lower, more people may be inclined to tap into things like equity. And if you do too much too soon, that could potentially infuse trillions of dollars into the economy, reversing the course and sending inflation back up. Just a little tidbit of information for you to digest this morning while you are sipping your coffee.