Federal Reserve lowers its Interest Rate to almost 0%

BBC News: Click Here

According to BBC News, US Federal Reserve is planning to keep its main interest rate at zero level for an extended period of time. Federal Reserve said that they have dealt with inflation and it is now under control.

Why would the government want a near zero level interest rate? It is to boost up the consumption and get out of abyss of recession. If an interest rate is like 10%, it will promote people to put their money into banks and save. So it will discourage people to consume. For that reason, the Federal Reserve is lowering their interest rate in order to boost up the consumption and lift up the economy.

There is one problem that will make the decision point less. Even if the government lowered the interest rate, if people are still paying for the house debts, it would not boost up the consumption as intended. If people are dealing with house debt problems, they are most likely to have very low confidence in using money. Also, the low interest rate will actually do them harm because they are getting less money from the bank to repay the debt. So this problem defeats the purpose of lowering interest rates.

However, BBC News “noted that consumer spending had “picked up,” and there were improvements in the housing market.” It means that majority of the people have dealt with the problem and they are confident in spending. So lowering interest rate was an appropriate decision.

Federal Reserve, therefore, expects the rise in consumption and alleviation of the pain from recession. However, if the interest rate stays low for too long, it will create an inflation, again, and will promote risky-investments, which will do harm to the economy.


6 Responses so far »

  1. 1

    Irfani said,

    It seems like the US economy relies heavily on the housing market and interest rates are what causes the problem in the first place. Although it is good that the US economy is bounsing back, there are still unemployment to deal with.

    • 2

      11kimsa said,

      Hi Irfani, thanks for posting comments.

      I agree that US economy relies too much on the housing market. It was one of the major factors that have caused the economic depression. I think that if the housing market goes back on track, it’ll give many investors confidence and the economy will get going. With increased investments the unemployment rate will hopefully get lower too!

  2. 3

    Dominic Fajardo said,

    Great post Sang! Ben Bernanke really knows how to control an economy after a recession. He is quite possible the best Chairman the United States Federal Reserve has ever had. People need to pump their money back into the economy and what better way to do this than to lower interest rates across the board. A cut in interest rates to almost 0% will surely make consumers like myself spend more.

    Hopefully Bernanke’s decisions help increase consumption to alleviate the pain everyone experienced from the recent recession.

    • 4

      11kimsa said,

      Thanks for commenting,

      I think that this was kind of ‘force’ people to spend, invest again. It gave the people a disadvantage if they just kept their money on their banks. It sure is a great thing if everyone spends, however, people should spend withing their ability/capacity. What I mean is that people should not spend so much that they go bankrupt. However, I just hope that this will save the economy out of the recession.

  3. 5

    Peter Anthony said,

    The very low interest rates are usually designed to spur investment especially from the business sector. The policy of very low interest rates has not had much success in Ja[pan where rates have been very low for quite some time.

    • 6

      11kimsa said,

      Hi Dr. Anthony, I was quite surprised that when I heard Japan has a very low interest rate. I thought that both low confidence and the ‘high interest rate’ have pulled down on Japanese investments and consumption. But, I guess that Japanese households are very doubtful about their future. Strictly in financial point of view, it is not beneficial leaving piles of money ($ 15trillion) on their bank account. It’s a pity that Japan is in an economic depression despite the fact that Japanese households have over 15 trillion dollar of saving (which is like… the same as US GDP).

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