The Fed shows its cards

It was at the December meeting that the Federal Reserve finally came out and set a target for how long it will keep interest low, and how long it will continue to buy mortgage bonds.

The Fed said it will continue to buy bonds until the unemployment rate hits 6.5 percent, as long as the inflation rate does not go above 2.5 percent. (The Fed top for inflation was previously 2 percent.)

The Fed went on to say it will keep short-term rates low until 2015, extending the deadline for an additional year. Buying mortgage bond in the open market (currently $40 billion per month) keeps mortgage rates down, and the Fed Funds rate (the short term rates, set by the Fed, at which banks can borrow money) is currently at .25 percent.

This new disclosure is a big win for Chicago Fed President Evans, who had been lobbing the chairman and other Fed presidents to start this transparency. The hopes are that having this type of transparency will allow companies to have a clearer vision of what the Fed is thinking and what their future moves will be so that they, as companies, can make better financial decisions.

There are still many critics who contend that all of the bond buying and interest-rate reducing will trigger some serious inflation in the future, but to those critics I say that they should trust the Fed and let them do what they do best.

Inflation is the least of the Fed’s worries right. What they are really fighting is deflation. The Fed CANNOT publicly come out and say that we are on the verge of a deflationary disaster, because if they did, the markets would sell off and companies would stifle investments and hiring.

This coupled with fact that most of Europe is either in or entering a recession, China is slowing down, and our own economy is struggling, and we should be thankful that we have a Fed chairman, Ben Bernanke, who is willing to use unorthodox but effective measures to try and keep things moving and to steer us away from the next Great Depression. Let’s remember that inflation is much easier to fight than deflation. If you don’t think so, just talk to the people of Japan, who have been fighting deflation for the past 10 years.

Chairman Bernanke has studied the Great Depression for many years and has also written a book on his findings. He is well-versed on what to do in a crisis situation, and should be trusted. So to all the critics out there, don’t quit your day job, Big Ben knows what he is doing and, God willing, he will be able to bring our economy back to life.

For more, call 773-557-1000 ext. 15, e-mail ron@ronmortgage.com or visit www.ronmortgage.com.

Please send any questions, comments or complaints to . You also can call me at 773-557-1000, ext. 15.