The Federal Reserve vowed this week to keep interest rates near zero until national unemployment falls to the pre-recession levels, which could take up to three years.
The main interest rate will remain steady until at least mid-2015, the Fed said. At that point, unemployment is expected to drop below 6.5 percent. Currently, the national unemployment rate is 7.7 percent. While the Fed has previously indicated that it planned to keep interest rates low, this was the first time that the interest rate level was linked to a specific economic marker.
Stimulating the Economy
“This approach is superior” to setting a timetable for a possible rate increase, Fed Chairman Ben Bernanke said at a news conference. “It is more transparent and will allow the markets to respond quickly and promptly to changes” in the Fed’s economic outlook.
Bernanke went on to say that even after the unemployment rate reached 6.5 percent, the low interest rates could continue. It’s a good way to keep stimulating the economy, he said. However, at that point, other economic factors must be taken into consideration.
At the same time, Bernanke warned that a more serious financial crisis could cause sharper economic pain. The impending fiscal cliff, which would mean sharp tax increases and deep government spending cuts on Jan. 1, is already hurting the economy by eroding consumer and business confidence, he said.
“We cannot offset the full impact of the fiscal cliff,” he said. “It’s just too big given the tools that we have available and the limitations on our policy toolkit at this point.”
Fiscal Cliff Talks Continue
The talks between President Barack Obama and House Speaker John Boehner continued this week in an effort to hammer out a deal to avoid the fiscal cliff, which experts agree could set off another recession. The core sticking point – higher taxes on the wealthy – has seemingly brought the negotiations to a standstill. Sources on both sides of the debate said that neither party has compromised enough to come to a conclusion.
Republicans said that the president hasn’t come up with serious spending cuts and reforms to so-called entitlement programs that include Medicare, Medicaid and Social Security. Democrats contend that Boehner won’t budge when it comes to agreeing with Obama’s demand to maintain the current tax rate on most American while increasing taxes on the top two income brackets.
Reassuring the Public
Even with this, some say the announcement regarding the low interest rates may be able to defer some of the trepidation. The low rates are a way to reassure edgy consumers, investors and companies, Joseph Gagnon, a former Fed official who is a senior fellow at the Peterson Institute for International Economics, told The Associated Press.
“This is trying to get away from that sense of ‘Oh, my God, this is all about gloom and doom,'” Gagnon said.
Some remain skeptical that even the low interest rates won’t help the sputtering economy. Greg McBride, a senior financial analyst for Bankrate.com, told Bloomberg News that he’s skeptical about the effect the prolonged low interest will have.
“Low rates are not a panacea for this economy,” he said. “If they were, it would have been sunshine and daffodils four years ago.”
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
- Crutsinger, M. (2012, December 12). Fed sends clearer signal on keeping rates low. Associated Press. Retrieved from http://news.yahoo.com/fed-sends-clearer-signal-keeping-185226898.html;_ylt=A2KJ3CeE3slQiAIAbA7QtDMD
- Kearns, J. et al. (2012, December 12). Fed Officials Forecast Main Rate to Stay Near Zero Until 2015. Bloomberg. Retrieved from http://www.bloomberg.com/news/2012-12-12/fed-officials-forecast-main-rate-to-stay-near-zero-until-2015.html
- McAuliff, M. (2012, December 12). Fiscal Cliff: John Boehner Tells Republicans Not To Make Plans For Holidays. The Huffington Post. Retrieved by http://www.huffingtonpost.com/2012/12/12/fiscal-cliff-holidays-john-boehner_n_2285381.html