Posts tagged reserve

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.

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