The Impact of the Federal Reserve’s Rock Bottom Interest Rates
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The Impact of the Federal Reserve’s Rock Bottom Interest Rates
The Federal Reserve might be planning to introduce an interest rate hike, but the move might not shield the economy from the long-term implications of its last decision to enact extremely low interest rates. The drastic decision was part of a larger effort to save the economy from the recession caused by the coronavirus pandemic. Cutting interest rates enables the economy to receive billions of dollars in corporate IOUs while equally stabilizing the debt market. However, Keynesian economics highlights that the Federal action could be unintentionally worsening the economy by increasing inequality between the rich and poor. While cutting interest rates to unprecedented levels was strategic in protecting the economy in the short-term, it benefits the upper class at the expense of the working class, putting the future of the economy at further risk.
Lowering interest rates hurts the savings of modest, average income generators. According to Sloan (2020), the low interest rates meant people had greater access to mortgage loans. Therefore, the monetary policy provided the necessary support for housing prices and the real estate industry. In a way, the move was supporting home equity, which is a big asset for middle-class income earners (Sloan, 2020). More Americans could buy or build homes, while construction companies could maintain the creation of blue-collar jobs. Despite the positives, the low-interest rates incentivize the middle-class to spend their savings.
Federal securities purchases entail the buying of debt from companies that are laying-off employees while giving shareholders substantial dividend payments. In one scenario, the low-interest rates reduce the value of securities market, which reduces the income for modest savers (Chapter 1). Low-risk or no-risk investments are no longer an option due to the low-interest rates. Middle-class earners are forced to enter into the stock market, which is riskier for personal capital (Chapter 4). The interest rates are so low that they are negating the benefits of income. Such a precedence is disastrous for investments; such as pension funds. There is an increased risk of pension recipients receiving reduced payments.
The low interest rates also put the middle and working class at the risk of rising rates in the future. As aforementioned, the reduced rates incentivize people to take up loans for houses, cars etc. (Chapter 1). Some of these credit payments will not be complete by the time the Federal Reserve decides to return interest rates to normal. Therefore, middle-class earners will have to pay more or dig more into their savings to offset the new interest rates. The decision to lower interest rates will not protect people with debt from the implications of future inflation. Such a possible scenario outlines why the Federal decision to lower interest rates could have future negative implications that outweigh its current benefits.
The Federal Reserve is put in place to protect the economy and its citizenry from economic turmoil. One way it does this is by ensuring middle-class earners are protected from inflation and have the opportunity to save for retirement. While the decision to lower interest rates was able to protect the economy in the short-term, it risks its future health by negating the middle-class’ ability to save. Pensions are digging into their savings while receiving reduced payments due to lower investment yields from securities. Unfortunately, it is the upper class that purchases all these debts and benefits from their default. The Federal Reserve should devise a different way to protect the middle-class in a larger effort to stabilize the economy.
References
“Chapter 1: Overview of the Federal Reserve system.” In The Federal Reserve System: Purposes and functions. (pp. 1-7).
“Chapter 4: Promoting financial system stability.” In The Federal Reserve System: Purposes and functions. (pp. 54-71).
Sloan, A. (2020, October 21). The Fed saved the economy but is threatening trillions of dollars worth of middle-class retirement. ProPublica. https://www.propublica.org/article/the-fed-saved-the-economy-but-is-threatening-trillions-of-dollars-worth-of-middle-class-retirement