The Fed’s take on interest rates, inflation

The Federal Reserve intends to keep interest rates low as the economy improves, but also stands ready to raise interest rates if necessary to combat inflation. That’s according to a speech Federal Reserve Chairman Ben S. Bernanke delivered to two Congressional committees earlier this month.

Borrowers can monitor Fed’s outlook
The Fed doesn’t directly control or set interest rates on mortgages, auto loans, credit-cards or other types of consumer debt. However, the Fed’s actions and target interest rates do have a big effect on the general level and direction of interest rates on mortgages and other consumer financial products.

For that reason, it’s helpful for borrowers to keep an eye on the Fed and try to figure out how the Fed’s plans might affect their own personal financial situation. Borrowers may be able to count on low interest rates for a while, but should also keep in mind that the Fed is prepared to change its policies and raise rates at any time.

Rates to stay low for ‘extended period’
The Fed lowered its target federal funds rate to the lowest possible level of just zero to 0.25 percent last year. The Fed has held that target steady so far this year and will continue to do so “for an extended period,” if that’s warranted by economic conditions, Bernanke said.

Yet that extended period won’t last forever. The Fed also has developed an “exit strategy” that could mean higher interest rates in the future if the Fed decides that’s necessary. If the Fed raises its target interest rates, rates on mortgages, auto loans and other consumer loans could go up as well.

“We have a number of tools that will enable us to raise market interest rates as needed,” the Federal Reserve chairman explained.

Bernanke added that the Fed would raise rates and reverse or undo other policies that have been in place to stimulate the economy “in a smooth and timely manner” to avoid the risk of inflation.

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