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New Financial Help Coming From Feds

  Sanjiv Gupta CPA  Published 

Although Federal Reserve has been thinking about introducing some new stimulus to help deal with the financial pressure it is still debating whether to implement it. The reason for this hesitation stems from the average interest rate being 3.5% on a 30-year-old mortgage. While these rates are still above zero making a lot of officials believe that economic growth is possible by lowering these rates but at the same time these rates are at an all-time low triggering the doubt of how long these rates can sustain without damaging the normal activities of the financial market.

It is being concluded by the fed officials that the economy is not developed enough to reduce the increasing levels of unemployment and that extra action is needed to help the economy bounce up. However, the federal officials are divided among themselves on whether these additional actions will prove beneficial or will put more pressure on an already stressed economy.

Many are concerned about the effectiveness of the tools of the feds. It is under speculation that if the Fed pulls out assets in circulation, it can lead to major market downsize. Many are also skeptical about the feds reducing the interest rates as there is also a possibility that they go back up creating more pressure on the financial stability of the market. The federal decision-maker Brenanke understands the risk of implementing these tools and therefore would not take any decision unless the majority of the officials agree to it.

The feds have already taken a number of actions to stabilize the weak economy. They have reduced the borrowing costs for businesses and customers. As a result the interest rates on short term loans are almost zero and will continue to be so till 2014. They have acquired 3 trillion mortgage-backed securities and treasury securities. The acquiring of these securities has resulted in the lowering of the supply of assets which in turn has resulted into the lowering of the interest rates. It has also pushed the investors to accept a lower rate of return as the scarcity of assets has led to a rise in price. The result of the implementation of these policies coupled with a weak economy has resulted into lower demands for loans and has pushed the borrowing cost to lower levels. The feds have also given a boost to the stock market and controlled the value of exports by regulating the value of the dollar.

The benefits of these lower rates have been reaped by both the homeowners who can buy better homes and also the companies that can refinance their budget.