Over the summer, the Federal Reserve had discussed the possibility of raising interest rates. The interest rate has been around zero percent since the Great Recession of 2008-2009. Recently, the Federal Reserve said it would not raise the interest rate.
The Federal Reserve of the United States sets the monetary policy for the country. Simply put, it controls the money supply through the ability to print money and set interest rates. The lower the Federal Reserve interest rate, the lower other interest rates on things like savings accounts, credit cards and loans.
Low interest rates encourage people to borrow money and it expands the money supply. Lowering the interest rate is a power used to encourage economic growth. People see it as an opportunity to take out a cheap and easily payable loan to do things like buy a car, start a business and buy a house.
Low interest rates make savings account gains seem miniscule, so people will go out and spend more money and power the economic engine of the country.
The downside to low interest rates is the risk of inflation. The more money flowing in an economy, the less value that money has. High interest rates are the solution to inflation as it makes borrowing more expensive.
Loans become a more expensive source of money and savings accounts become more viable. The money supply shrinks because people are saving more than they are spending and borrowing.
The danger of this is that higher rates slow down demand and can lower economic growth to stagnation or recession. The job of the Federal Reserve is to balance between high inflation and economic stagnation.
In keeping the interest rate low, the Federal Reserve has kept to the policy of encouraging economic growth. A concern for reserve in their decision were the job rates and wage growths.
Recent job figures have been disappointing and wages have barely budged. Board members worry that economic growth is too fragile for an interest-rate hike. More expensive borrowing could cut off job creation and push the economy into recession.
Concerning inflation, a target inflation rate for an economy is around 2 percent. The inflation rate for the United States is 0.2 percent, similar to economic doldrums of Japan and the European Union.
One might hear candidates talk about inflation as if it were an issue in 2015. Given the data, deflation is more of a concern than inflation in the current U.S. economy. It makes more sense for the Reserve to keep interest rates low since the inflation rate is near zero and economic growth is anemic.
This decision means that interest rates on loans ranging from student to home and auto will not increase and should stay where they are. Businesses have continued access to cheap money to borrow to fund expansion so job creation should not turn negative.
However, the super-low interest rate has taken a crucial tool away from the Reserve. If an economic slowdown were to occur under current rates, the Reserve would not be able to lower interest rates and be powerless to intervene in the economy.
The reasoning for the Reserve’s decision illustrates the problem of the economy that monetary policy is failing to fix. Low job creation with stagnant wages and inflation rates near zero seem resilient to the Reserve’s medicine of low interest rates.
This stagnation of wages and near deflation may be the “stagflation” that ends the Monetarist (economic school that believes in tight control of the money supply) credibility like the high unemployment and high inflation of the 1970s ended Keynesianism.
Moving forward, policy makers must focus on boosting job creation, wage growth and bringing the economy away from deflation. It is time for the government to do its job and tackle these problems through stronger labor rights and using tax dollars to invest in job-creating endeavors such as infrastructure development, education and scientific advancement.
These were the policies of Presidents Eisenhower and Kennedy, and the United States was prosperous with full employment, growing wages and a burgeoning middle class. This prosperity can be attained and it is up to the voters to demand their elected officials to do these things and bring another American century.
The views expressed are those of the writer and do not necessarily reflect those of The Torch. Contact Hunter Balczo at email@example.com.
Two weeks ago, the Federal Reserve of the United States released a short statement on economic growth, and, more importantly, monetary policy in the near future. News to you? Don’t feel bad.
As I peruse online news sources, it becomes abundantly clear that the mainstream media knows all too well how their ratings will suffer when they start spewing complex numbers and unfamiliar jargon to people relatively uninterested in America’s banking bureaucracy.
Interpreting the Federal Open Market Committee’s cryptic messages in laymen’s terms and explaining what these decisions mean to the economy at large would give citizens piece of mind in an economy which is still far from pre-recession prosperity. Hopefully this column can help.
Allow me to share a brief history on the Fed, some commentary on the Fed’s current practices and a hearty conclusion about the Fed’s role in the fate of the U.S. economy.
First, some history on the Fed. After over a century of arguing over the proper role of a national bank, the Fed was created in 1913 under the premise that it would balance the will of the banks with the economic welfare of the public. Since the Great Depression, the Fed has developed three main goals: maximize employment, stabilize prices and moderate long-term interest rates. Together, these factors lead to economic growth, at least in theory.
The short and sweet version of the report goes something like this: year-to-date, growth rate and rate of employment have been, at best, moderate. This is despite a continuance of record-low interest rates. For the sake of simplicity, pretend the Fed is a bank, and smaller, independent banks are individual borrowers. If you want to buy a house, for example, you will need a loan from the bank. Some people will be willing to pay 15 percent interest on the loan, but more will take out loans if interest is 5 percent.
When the economy tanks, banks need to charge higher rates to customers to continue to function. Unfortunately, it is precisely at these times borrowers cannot afford higher rates. At these moments, the Fed allows banks to borrow from the national reserve at a lower rate (currently .25 percent). The banks, able to get “cheap money,” are also able to lend at a low rate, increasing economic growth.
The fact that the Fed refuses to raise their interest rate should serve as a caution to investors, whether that investment is in the stock market, a car or a home. By keeping the rate at its lowest possible point, the Fed is saying people would still rather save than spend.
In other words, improvements in employment levels and prices are not impressive enough to moderate interest rates.
A good amount of the FOMC report rambles about medium-term trends toward a healthy 2 percent inflation rate. Their outlook, however, is muddied by declines in the energy and import sectors.
Translation, “we blame China.” Seriously? To an extent, this causal statement is valid. The very idea that the Fed can accurately devine global market trends is absurd.
For example, in fantasy football, trading one player for another or benching that tight end you just know is going to get hurt this week may win a game, or even clinch a league, but even the most superstitious fantasy footballers would write off the notion that their actions have a direct effect on the performance of players on and off the field.
According to the Fed, 10 percent of the time, they are 100 percent right, and when they’re not, it's just because Tom Brady just had to go and roll his ankle.
Here’s the problem: It’s ludicrous to lay the blame for U.S. economic prosperity largely on other global economies. When interest rates have been at a record low for over five years and the economy has officially “recovered,” the logical expectation would be that interest rates would rise again.
This assumption is perpetuated each time a new Fed statement maintains rates while claiming a rate increase is on the table for the next month. When the world’s largest economy threatens to essentially decrease domestic investment, other countries expect their ability to import and export goods to diminish and prices to increase.
Anticipation of such contractions should, and does, force national banks in countries like China (which also owns 14 percent of our national debt), to batton down the hatches. Claiming continued growth in China, albeit slowed, is a more powerful force than American monetary policy is akin to blaming an earthquake on an avalanche.
Unfortunately, our Federal Reserve has spent far too much time issuing heady reports and promising a better economic picture “next month.” What we really need is a more honest dialogue about the potential energy of this historical body and a hard look at its viability to really lead economic recovery in this country.
The views expressed are those of the writer and not necessarily those of The Torch. Contact Jacob Schlosser at firstname.lastname@example.org.