In lieu of the current economic downturn, the Fed cut interest rates to 1% along with other countries including China and Norway who are cutting their interest rates as well. According to the article "Lower interest rates are usually a powerful tool to boost economic growth, because they reduce the cost of borrowing for businesses and consumers, giving them an incentive to start new projects or spend money. Lower rates also reduce the cost of funds for banks, which theoretically should make them more willing to lend."
However, the Fed is concerned that cutting the interest rates will not boost the economy as it traditionally does. For example, Japan cut interest rates to 0%. Due to the economic crisis and people gearing towards risk adversity "zero percent interest rates failed to revive the economy earlier this decade"
3 comments:
Typically when the interest rate is lowered it allows some growth in the economy, however this has been occurring for some time now. The Fed has continually lowered interest rates over the past year and now the expectation is that it can fall even further. It is also evident that the economy will not bounce back any time soon from this depression and therefore interest rates will be cut again in the near future. This monetary method will thus cause no immediate positive results for this time.
I agree! I think we also discussed about this in one of the earlier posts. Lower interest rates are usually used as an expansionary monetary policy. However, as consumer confidence still remains low as it is right now, people will be less inclined to borrow money from banks, even though the interest rate has decreased. Even when they borrow money, they won't necessarily "spend" it, but maybe rather pay off debts. This won't help the economy much. At the same time, as interest rates are still expected to lower in the near future, people will still tend to wait. All and all, the government better come up with some other policies to help the economy.
i do not think that the fed should have lowered interest rates. The government gave the banks 700 billion to get them out of the credit crunch. With interest rates so low, no one is willing to invest or save because the rate of return will be very low. The fed needs to increase interest rates to increase consumer saving and investment, banks are currently holding onto the bailout money and not helping the economy. I believe they need to increase interest rates to promote confidence within the banks.
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