US Federal Reserve might not be sure sure of economic future of the largest economy on earth but there is one thing about the US policy that is very sure, the ultra low interest rates will not change, not in near future at least. Federal reserve has always been very reluctant on its policy of keep interest rates down. Keeping a low interest rates has its purpose as it encourages households to save less and attracts more investment from corporate increasing the overall economic activity of economy. This means an improvement in labour market as more economic activities would increase the hiring and rehiring.
Even as signs of a sustained recovery become more prominent, it will be interesting to see how US government roll backs billions of dollars it pumped into the economy at peak of the crisis. But raising interest should be out of question at this point of time as US government is more concern about deflationary pressure than inflationary fears. The biggest fear is indeed the type of deflation Japan has seen in past 20 years which virtually halted the rampant growth of world’s second largest economy. But the matter of the fact is that Japan kept its interest rates to almost zero for decades but couldn’t create enough thrust to come out of the deflationary trap.
Situation with US is not very different. Even with such low levels of interest rates banks are still not increasing the lending and with the new stricter regulations the problems may increase. Same is the case for housing and consumer market in US. Households are under debt and they are trying to save more so that they can pay back their debt first. That means primary aim of keep interest rates low so that spending and investment could increase doesn’t seem to be working Federal Chief Ben Bernanke.
It seems interest rate is the only tool in Fed’s box when it comes to handling the unemployment. They simply lower the rates and wait for the situation to improve. But this may nor work this time. This is not the normal recession, we are dealing with economic disaster. Much more structural reform and over haul of American financial system is needed.
