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Kramer: Low federal interest rates imply economic uncertainty

The current economy of the United States is like an old boat that’s having some trouble staying afloat. And Federal Reserve Chairwoman Janet Yellen is trying to plug up the holes with extra large Band-Aids known as low federal interest rates. Since the recession, it has worked just enough to stay afloat, but she’s waiting for a true repair. And the Band-Aids are running out.

In a news conference last week, Yellen announced that low federal interest rates will be here to stay for a considerable amount of time, likely into 2015.  What does that mean? Vox, an online journalism site, did a fine job of explaining it; “the Fed boosts the economy by reducing the interest rate that banks pay each other for overnight loans … Those low rates spur businesses to make new investments, spur people to buy houses or invest in renovations and spur purchases of major durable goods like cars.”

Yellen will receive criticism regardless of what move she makes. But given the uncertainty regarding economic progress, it’s best for the job market and laborers that she continues her current policy into 2015.

The Federal Reserve is using a strategy called “forward guidance,” which essentially encourages people and businesses to spend and invest during a period of low rates before they rise again. But this policy simultaneously indicates that the economy will be depressed for a long time, leaving borrowers to wonder which path to take.

The prolonging of the rate cuts is a cause for concern, even if they exist to pave the way for optimism. The near-zero rates have been in effect since 2007 and each year economic growth slows and slows to a crawl. Gross Domestic Product expands year over year, but at numbingly slow rates. Jobs reports have been encouraging, but far too many new positions are part-time. It has not been the result that Yellen and former Federal Reserve Chairman Ben Bernanke had hoped for.



Interest rates will have to return to pre-recession levels eventually — barring another not-entirely-unlikely recession — and Yellen’s current stance, if it can be called that, is to “play for time,” as a Sept. 17 New York Times article phrased it, delaying any decision for as long as possible. The Federal Reserve has the power to influence the power of the dollar and the rates banks pay, but it seems to be realizing that it cannot resurrect a whole economy by itself. Forecasts for next year’s growth dropped from 3 to 3.2 percent to between 2.6 and 3 percent, in spite of several years worth of low interest rates.

The Ben Bernanke-era Federal Reserve that ran from 2007–14, which operated in the midst of the financial crisis, performed quite efficiently. Compared to the egregious pitfalls of the European economy and other parts of the developed world, the United States absorbed the impact of the recession and has recovered, albeit too slowly, partly due to the active — and controversial — role of the Federal Reserve.

Janet Yellen took over Bernanke’s position in 2014 and instantly became one of the most powerful women in the world, and maybe in history. She has been treading water since she entered office, and 2015 will be time for her to make a definitive move. With investors cautious, growth moving slowly and a general lack of confidence in U.S. markets, it’s best for her to keep rates low, for now. We can all hope together that the economy responds well next year. If it does not, then our ship is as good as sunk.

Phil Kramer is a sophomore finance major. His column appears weekly. You can reach him at [email protected] or on Twitter at @PhilipWKramer.





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