Is It More Likely the Fed Will Keep Interest Rates Low?

fedIn 2008, the US Federal Reserve bank lowered short-term interest rates to almost zero, a nearly unprecedented move that has been monitored and scrutinized ever since. Of course, economists and policymakers are now waiting for the financial core of the economy to raise the rates again. Unfortunately, it appears that they are not willing to shift. Since 2008, the only move the Fed has made, was an increase of just a quarter of a percentage point, last December.

And economists are taking note. Mark Zandi, of Moody’s Analytics, for example, argues, “The Fed will make a major mistake if it doesn’t raise rates. The job market is strong and very close to full employment. Inflation is close to target [2 percent annually], and financial markets are in good shape.” But even with this argument, Zandi believes that the Fed will only raise rates by another quarter of a percent; that is, if they raise the rates at all.

At the same time, Fed governor Lael Brainad remains vigilant in the case for staying put. She argues that inflation has not changed much since 2012 but the unemployment rate has, in fact fallen from 8.2 percent to 4.9 percent. Her argument is that policy should favor job creation in the absence of inflationary pressures.

Truly, this is an unstable time. The Fed was once powerful, yes, but flooding other major central banks with otherwise cheap money—Moody’s estimates roughly $13 trillion—to buy bonds and other securities did not yield strong results. Instead, the buy up buy the central banks, globally, has just barely avoided a second Great Depression instead of reversing it, as they had intended.

And this is yet more problematic. The old philosophy of throwing more money at problems has somewhat provided Americans with a false sense of security and that means proper recovery will be the doing of the American public and not private securities. After all, in many cases, recession recovery depends on recession severity: and in this case, both enterprises and households will be more protective and precautionary about their spending. People are more likely to save then spend, now, out of concern that the recovery will fail.

This, of course, means that bank can no longer manipulate economic growth with narrow margins. And by restricting credit (ie, raising rates), businesses will invest less and take fewer risks, resulting in yet slower growth.

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