Aside from the mansion and sport's car, near the top on most people's list of dreams would probably be a raise from the boss. However, if the hike in pay provided only a slight reprieve from a period of relentless inflation, that raise wouldn't exactly be reason to go out and buy a bottle of champagne to celebrate.
Such has been the case with the Federal Reserve's well acknowledged plans to keep interest rates at record lows until late 2014. On the outside the move looked promising as it gave some, especially depressed homeowners, more time to go out and refinance. However, refinancing does little when the drop in the monthly mortgage payment is sucked back up by the grocery bill.
As good as it initially is to have a drop in rates, an extended reduction by the Fed has opened the door and caused even more problems than it has solved. For many, the signs of the Fed's work have been quite noticeable. To a rise in everything from grocery bills to gas to a currency that currently is valued at less than 80% of face value, the work of the Federal Reserve is in clear view. It's asking them to now back up that has been the problem.
On Tuesday, Chairman Ben Bernanke and his group are on tap for another meeting with potentially good news. Reports are already surfacing that the board may take a step back from more quantitative easing. However, as good as a first step in the right direction as that may be, it's the actual move to raise rates that many should be looking for. Now don't misunderstand, having the Fed turn reckless in spiking interest rates defeats the purpose, but allowing rates to meander down around 0% goes against basic economics as explained below.
- The first group that feels the pain from an extended period of low interest rates is the banking sector. With such low rates, a number of people won't turn to financial institutions to deposit their money. Unfortunately, leaving banks with little on hand as far as loans and overall lending activity goes. With this lending activity absolutely crucial as far as earnings and the bulk of a bank's profit goes, there is ever more reason to believe the depreciation in value of many banks this year will continue until rates are raised.
- With the thought of putting money in savings account unattractive, consumers are more encouraged to invest or spend money. While that spending may be exactly what the Fed wants, that move might lead to a further delay in a full recovery down the road when those same people face hard financial times themselves or retire with very little in savings or in the bank.
- Perhaps most discouraging of all is the fact such a scenario encourages debt. Even though many will say they have become more cautious financially in recent years, the incentive for those to take on more loans and refinance can be extra tempting. Although such an approach can be beneficial to some extent, it can also just as easily leave an unanticipated mountain of debt.
For now, the Federal Reserve wants to act like the savior for both markets and citizens. However, if it doesn't figure out soon it has more the makings of an economic adversary, dour results loom around the corner.