Bernanke proclaims low rates to stay for awhile
February 25, 2010 by admin
FOMC Chairman Ben Bernanke is on Capital Hill this week testifying to the direction of the economy and the Federal Reserve’s plan to help stabilize the economy to try and help rebuild the public and private sectors. One of the most critical pieces to come from Wednesday’s testimony was a reassurance to the markets that the Fed would work to keep interest rates low for the foreseeable future. The Fed’s role in stabilizing the economy following the market collapse of 2008 & early 2009 was pivotal in helping avoid a catastrophic recession. The Fed aggressively lowered rates to try and spur lending to continue within the markets.
The decision to keep interest rates low for the near future should be viewed as a positive move that the Fed recognizes that the recovery could take upwards of another twenty four months to achieve. Low rates will enable banks to continue to operate with healthy profit margins, improving their balance sheets and better positioning them to begin to open up their lending options. The economies Achilles heal is clearly the lack of job creation that has occurred over the past two years as the market will struggle to replace over eight million jobs that have been lost since the beginning of the recession. Stabilizing the economy was critical to help slow down the rate of job cuts, but has not effectively worked at job creation to date. The Senate is reviewing a proposal aimed at stimulus funds and tax incentives for small businesses to begin hiring.
Clearly the Fed is taking a conservative approach with leading the economy out of the recession. There is a strong sentiment that the economies improvement may not continue and could quickly turn sour, sentiment that was backed up by the most recent reports gauging consumer confidence. A dip in the recovery could derail the markets and greatly impact the potential rebound of key components in the recovery (spending, jobs, real estate) all of which should benefit from ultra low interest rates for the near term.
The low rate promise has helped to push long term mortgage rates to record lows. Interest rates on home loans are well below five percent for thirty and fifteen year loan terms. Keeping home loan rates below historic levels will certainly be an aid in helping to keep the struggling real estate market from further imploding.