Federal Reserve Announces Low Rates Will Continue

On March 16, 2010 the Federal Reserve made an announcement that low interest rates will continue. CNNMoney.com reports that the Fed has decided to leave it’s “key interest rate near 0% once again” and “rates should stay this low for the foreseeable future”. After this announcement on March 16, the stocks in the United States began to rise immediately with the Dow Jones up 23 points, S&P Index rose six points and Nasdaq gained eight points. Despite this immediate surge, whether or not this is a positive decision from an economic perspective remains to be seen. The Fed feels the economy is likely to remain shaky and that “exceptionally low levels of federal funds rate for an extended period” (CNNMoney.com). The policy of keeping the rate low has been in effect since a year ago and it looks based on the March 2010 announcement that this policy is going to continue for the foreseeable future. The rates currently in effect are historically low. As of March 16, 2010 Bankrate.com reports the Fed rate at .25%. What is the Fed funds rate and how does it impact the economy? This rate is the percentage set by the Federal Reserve that dictates the interest rate banks can lend money. Laws require all banks keep a certain amount of money in their reserve on hand that earns no interest. Due to this, the banks have an objective and obligation to stick close to this limit so they don’t lose money, yet don’t break the law. As a result this rate has a ripple effect on the rest of the economy affecting loans, credit and savings. When rates are raised, it becomes more expensive to borrow and lowers the money supply. Consequently logic goes to state when rates are lowered it becomes cheaper to borrow and money supply increases. In today’s economic climate people are inclined to spend less because of financial uncertainty and lowering the rates is an incentive for people to spend and pump more money into the economy. While the Fed acknowledges the economy has made improvements and that the job market is not plummeting the way it was last year and is “stabilizing” (Businessweek,com), the Fed also states economic growth in the short term will be moderate and that could change down the road, but concedes that future is yet unseen. Businessweek.com also reported former Fed Governor Lyle Gramley as saying “The Fed is right to be cautious at this point”. Gramley is now a senior economic adviser at the Potomac Research Group in Washington. Another question that needs to be asked is whether or not these low rates are really good for economic growth. Economist Joseph Carson states “the Fed appears to be underplaying the recovery of the U.S. economy” and points out forecasts made by the Fed project approximately 4% growth this year and next. Carson also states “staying at a 0% funds rate while the economy is starting to grow will eventually lead to imbalances” (CNNmoney.com). Is the Fed’s decision to keep low interest rates a good one? Time will tell. References: CNNMoney.com Bankrate.com Businessweek.com Category:Home › Other • Pomegranates: A newly discovered superfood • Where did the joke why did the chicken cross the road come from and why is it funny? • Can mothers diagnosed with bipolar disorder make good parents? • Spiritual evolution of human consciousness • Tips for getting a college basketball scholarship • Living with Pseudotumor cerebri (PTC) • Caring for the caregiver • Technologys impact on society