After a series of measures to remedy the mortgage crisis that has beset the US economy, Ben Bernanke, chairman of the Board of Governors of the Federal Reserve and his colleagues are once again looking at cutting the central bank’s key interest rate as they hope that lowering the interest rates will give the economy a boost by encouraging investors and consumers to borrow and spend
After a series of measures to remedy the mortgage crisis that has beset the US economy, Ben Bernanke, chairman of the Board of Governors of the Federal Reserve and his colleagues are once again looking at cutting the central bank’s key interest rate as they hope that lowering the interest rates will give the economy a boost by encouraging investors and consumers to borrow and spend (Associated Press, n. pag.). The Fed is looking at slashing the interest rate by a full percent however, many economist believe that this is not the appropriate remedy for economic conundrum (Gavin, n. pag).
According to many analysts, the issue of the economy regarding the mortgage is the lack of confidence by both the lender and the borrower. Even as the Fed resorts to drastic interest cuts, the first time the central bank has cut a full percentage point in one shot since 1982, this provides little help if lenders are not loaning money out of fear they will not be repaid and the borrowers are reluctant to make loans since they are worried about losing jobs (Gavin, n. pag).
In a recent report by the Labor Department, private employers all over the country have cut jobs in each of the past three months. With consumer spending being responsible for over two-thirds of US economic activity, it is unlikely that the interest cut will have a significant effect in the economy (Gavin, n. pag).
The Federal Reserve’s move to lower the interest rate aims to stimulate a loan frenzy. By lowering the interest rate, mortgages will be made available to borrowers at more affordable rates. The Fed hopes that the American consumers will once again be enticed to take mortgages and ultimately be able to revive the economy. However, this move is quite a long shot.
First, the Fed is banking on the idea that a demand for mortgages will increase if the interest rates are cut. Although this is what a change in demand means in elementary economics, it seems, however that the Fed failed to factor in the trend of the US housing market. According to reports the house prices are continuously plunging while the cases of mortgage defaults and foreclosures are increasing. These causes the investors and more importantly the lenders to lose confidence in the economy (Gavin, n. pag).
Second, this is not the first time the Fed lowered the interest rate. Since last September, the Federal Reserve has cut the interest rate for a total of six times, with the reductions becoming more aggressive since January (Associated Press, n. pag.) and this raises a valid concern. Although the Fed has its own army of experts, this interest-slashing spree might reach the point of diminishing returns if the consumers do not respond favorably to these drastic measures.
Last, the Federal Reserve is not really addressing the issue of confidence by cutting the interest rates. One of the biggest reasons why the consumers are reluctant in acquiring mortgages is the fact that private corporations nationwide are practicing massive lay-offs. Lenders on the other hand are gripped by distrust as the business is beset with
Personally, the Fed would have been better off if it had taken measures that would have addressed the issue of employment and bad debt.
Works Cited
Associated Press. “Fed cuts key rates three-quarters of a point.” March 18, 2008. The msnbc website. 27 March 2008.
Gavin, Robert. “Economic quicksand.” March 18, 2008. The Boston Globe website. 27 March 2008.
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