Low rates squeeze savers. Should Fed hike them?
Low rates are supposed to stimulate the housing market, but haven't done much so far. Low rates are hurting retirees, however.
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Low rates are a tool that Fed officials have long used to boost weak economies. In recessions past, when the Fed slashed rates, a drop in borrowing costs led companies to hire and expand.Skip to next paragraph
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More people bought homes, too. Stronger home sales encouraged builders to erect houses and hire construction workers. They also increased consumer spending as new homeowners bought appliances and furniture. That's why a housing recovery normally energizes the entire economy.
It hasn't worked that way this time. This recession followed a devastating financial crisis that damaged the banking system and made lower interest rates less effective.
It's true the Fed's easy-money policies may have kept the economy from getting worse. And they might have prevented a dangerous deflationary spiral of falling prices, wages and profits — a threat that had worried Bernanke a year ago.
But super-low short-term rates and two rounds of Treasury bond purchases haven't delivered a robust recovery. The Dow Jones industrial average is down 11 percent since July 21, partly on fears that the economy might slip back into a recession.
Businesses aren't feeling expansive, not even with the prime lending rate for banks' best business borrowers at a low 3.25 percent. Corporations are sitting on nearly $2 trillion in cash. They're waiting to be convinced that the economy is improving before they'll spend much of it.
And consumers are still too intent on paying down the debts they piled up through the mid-2000s to go on many credit card-charged spending sprees.
Even with mortgage rates near record lows, home sales remain weak. The average sales price of an existing home has dropped 30 percent since before the recession.
Many homeowners can't trade up to a more expensive house because they can't sell their homes. They owe more on their mortgages than their houses are worth.
New homeowners might not qualify for mortgages because banks have tightened lending standards after absorbing loan losses during the recession. And a vast inventory of foreclosed homes will likely depress housing prices for years.
"You're trying to stimulate an industry that has so much garbage sitting on top of it that it won't work," says Ford, now a finance professor at Middle Tennessee State University.
The bottom line, Fed critics say, is that super-low rates aren't stimulating the economy enough to make the financial pain to savers worthwhile.