Earlier today Ben Bernanke, the Chairman of the Federal Reserve, announced that the Fed would be leaving the nation’s key interest rate at its current “exceptionally low” level. Since December of last year, the rate has been set at 0 to .25-percent in an effort to spur lending throughout the country—so far without much success. This lack of lending was evidenced earlier this week when President Obama called the heads of the country’s major banks to the nation’s capital for a powwow to develop strategies to increase lending to small businesses and individuals.

The Federal interest rate is the key number that determines the financing for mortgages, car loans and other credit, as well as the rate at which banks lend between themselves. Through the low interest rates and the stimulus from the TARP, banks—theoretically—should be able to lend more. That has not been the case, however, as banks have hiked up interest rates on credit cards and been reluctant to provided loans to small businesses. There has been some ease of credit, most notably in the housing market, as the average financing for mortgages has dropped by one-percent over the last year. However, this has hardly led to a flurry of new home purchases.

Even as the economy shows initial signs of recovery, those on Main Street are still feeling the financial pinch. Despite third quarter news that the GDP is growing and the economy appears to be in recovery mode, unemployment is still at dangerous levels; experts predict that unemployment will still in the double-digits well into next year. This, according to financial analysts, was the main motivation in keeping the interest rates low.

“That’s their primary concern: getting to the point where the economic recovery is sustainable and jobs are a crucial element of that,” said Mickey Levy of Bank of America.

Low interest rates can’t last for ever, and many believe that the Fed will first begin to raise them midway through 2010. The Fed has to work a careful balancing act, weighing the needs of a fluent credit market against the risks of inflation. While the lower interest rate will help top ease the rampant unemployment epidemic, there are some adverse consequences to lending money with virtually no interest. At a consumer level, it means that the interest accrued on savings accounts and CDs are minimal.

It also puts the nation’s currency at serious risk for further inflation. The dollar has already been steadily losing ground against other currencies around the globe, and low interest rates will only exacerbate the problem. This trend is directly related to another looming concern for lawmakers and the American people: the national debt. Congress is currently working to once again raise the debt ceiling—which is currently set at $12.1 trillion—by another $2 trillion, give or take a “little.”  Today the House voted to allow the government to borrow an additional $290 billion…and that is just to cover six extra weeks of operations.

The interest rate is not the only means that the Fed has to influence financial markets, and the economy as a whole. By the end of March, the Fed is scheduled to buy roughly $1.25 trillion in mortgage backed securities from Fannie Mae and Freddie Mac. These financial instruments were an elemental component of the financial collapse, and still pose a threat to the financial system.
The Fed—and Chairman Bernanke in particular—have been under scrutiny from Congress lately due to the role they have played in the aftermath of the financial meltdown. Although there are signs the TARP and other stimulus programs, which are scheduled to be concluded next year, eased the pain and expedited the recovery, many politicians believe that other methods would have been more effective.

By design, the Fed is subjected to little, if any, oversight by another governmental institution. Despite the small amount of oversight, the establishment has a colossal impact on the financial health of the US and, to a lesser extent, the world.

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