The Federal Reserve declaring that the economy would need help for years to come, said Wednesday it would extend by 18 months the period that it plans to hold down interest rates in an effort to spur growth. The Fed said that it now planned to keep short-term interest rates near zero until late 2014, continuing the transformation of a policy that began as shock therapy in the winter of 2008 into a six-year campaign to increase spending by rewarding borrowers and punishing savers. The Fed forecast growth of up to 2.7 percent this year, up to 3.2 percent next year and up to 4 percent in 2014, but at the end of that period, the central bank projected that the recovery would still be incomplete. Workers would still be looking for jobs, and businesses would still be looking for customers. The economic impact of the low-interest rate extension, however, is likely to be modest. Many businesses and consumers can’t qualify for loans, a problem the Fed’s efforts do not address. Moreover, long-term rates already are at record low levels and, like pushing on a spring, the going gets harder as it nears the floor. Finally, the Fed already was widely expected by investors to hold rates near zero well into 2014, limiting the benefits of a formal announcement. Since the beginning of the financial crisis in 2007, the Fed has alternated bursts of activity with periods of rest, concluding several times that it had done enough only to find the economy still struggling to recover. The Fed announced last summer that the central bank intended to keep interest rates near zero through at least the middle of 2013, and that it would seek to reduce long-term interest rates through changes in the kinds of investment securities it holds. Since then, two meetings had passed without the introduction of any new programs. This is a perfect example of what we were talking about in class about economic systems vs. economic policies. The distinction is very clear in this article, and it will be interesting to see if these policies that the Fed plans to enact and continue, will spur the growth they predict low interest rates may incur.
http://www.nytimes.com/2012/01/26/business/economy/fed-to-maintain-rates-near-zero-through-late-2014.html?ref=economy
4 comments:
I'll be curious to see if these policies can actually be implemented. Extremely low interest rates give people loaning money very little incentive to loan to others. An interest rate close to zero means that the loaners are getting very little profit for the immediate costs to them. Also if the new programs created by the Fed can't be utilized by many firms than there may not be much benefit or aid from them.
The Fed is trying to get banks to borrow money from them but the banks are unwilling to do so. The banks are holding extra reserves and hesitant to give out loans like they used to. With keeping interest rates really low, I wonder if banks will start eventually borrowing money from the Fed.
The banks don't want to loan because there is no incentive as Kim said and also no incentive to save. But although there is spending its not as high as it should be in theory. Consumer confidence is low because everyone is unsure of how this is going to pan out and how long it could take.
It seems as though The Fed is in a situation where it may be between a rock and a hard place. It has kept interest rates low in an effort to spur borrowing, but the banks are not necessarily following suit. Many individuals have bad credit ratings due to defaulted loans. This has made banks leery to lend money for those who want mortgages. Also, the decrease in the interest rate has led to a decrease in return on savings. While the projections have the unemployment rate dropping for the next few years. The policy may be viewed as a failure by some politicians.
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