It appears some people never learn. On Tuesday, the Federal Reserve’s Open Market Committee announced they would be keeping interest rates at record lows until at least mid 2013. In a statement from the FOMC, the Fed stated “To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent”. The FOMC has decided to keep interest rates at record lows in an attempt to pick up growth since the recovery has been slower so far this year than expected, but keeping rates this low will have the opposite effect.
After the financial collapse of 2008, the FOMC decided to lower the federal funds rate to 0-0.25% in December of 2008 to have credit flow more freely to financial institutions in an attempt for these institutions to recover after experiencing near bankruptcy. Many mainstream economists said the Fed’s decision to set interest rates at record low levels was a brilliant idea, and was necessary in order to prevent an economic depression. Government officials and the Fed stated that more liquidity in the US markets was the answer to solving our problems and putting a halt to the recession. However, the decision to significantly lower interest rates has not shown any real results in economic recovery, as the unemployment stays high, stocks have not shown any real growth, and the US dollar continues to lose its value against commodities and foreign currencies.
Although some argue that significantly low interest rates by the Fed prevented a depression after the 2008 financial collapse since we haven’t seen depression level figures for the US economy, it can be refuted by stating these artificially low interest rates have just prolonged the harsh recession that should have happened in late 2008. When the Fed decided to lower interest rates to a 0% level for the first time in its history in December of 2008, they took action in lending trillions of dollars in 0% interest loans to banks, corporations and financial institutions in the US and abroad from late 2008 to present day. These no interest rate loans have allowed these companies to pump their bank accounts full of temporary assets based off credit from the Federal Reserve. These assets have allowed companies to prop up their books and avoid having to record any significant losses as they can cover such losses with temporary cash they have on hand from the 0% interest loans.
Since the Fed has artificially propped up US markets by allowing some of the largest corporations in the world to borrow money without having to pay interest, the Fed has allowed these corporations to avoid showing losses which will be inevitable in the long run. Since the majority of the companies that are borrowing at 0% interest rates right now should have declared bankruptcy in 2008-2009, no true recovery will begin to happen for the US economy as long as they borrow money from the Fed on cheap credit to avoid having to report significant losses. The Fed’s recent decision to keep interest rates at all time lows until at least 2013 will just continue the trend these companies have been on in artificially propping up the assets on their books. The best and only decision the Fed should make at this time is to raise interest rates and allow the US economy to face reality before things get worse.- Liberty_Mike