Are Interest Rates at Virtually Zero Really Good for the Economy?

On Tuesday afternoon at 2:15, the Federal Reserve produced a shock and awe statement that left economists and investors with their mouths opened wondering what just happened. The Federal Open Market Committee, or the FOMC, decided to lower rates by .75% to 1% and establish a new "target range" for rates of 0-0.25%. In their statement, they point out the grave state of the job market as one of the main reasons for their major cut of interest rates. Clearly the Federal Reserve is concerned that the huge losses in jobs in this country has us sliding into either a deep recession or even a depression. It may sound crazy, but there is no way the FOMC would cut rates to virtually zero if it thought the economy could recover on its own. Quite clearly, the Fed believes that our economy is hanging in the balance and that it must do absolutely everything it can to save it.

Not only did the Federal Reserve lower interest rates drastically, but it also said it will be in the market to buy things such as treasuries, credit card debt, student loans, and anything else that could help stimulate our economy. Some economists half jokingly said the next thing the Fed will be doing is buying up stocks to hold up the stock market.

What will interest rates at virtually zero mean for our economy? Obviously the goal is to increase borrowing and consumer spending on projects and get our economy moving again. The issue is, even with interest rates at almost 0 a person who fears for their job safety is unlikely to be wanting to borrow anything for a new project. Secondly, credit isn't easy to come by and simply getting a loan from a bank sure isn't what it used to be.

What kind of people will be hurt by this drastic cut in interest rates? The people who have a lot of money in certificates of deposits or money market savings accounts. These investments will most certainly yield far less in the next few weeks and months than they have in a very long time. When interest rates get to zero, there is just no way the bank can afford to offer attractive yields.

I think the Federal Reserve's move to lower rates was more psychological than anything else. The Fed wants Americans to understand that it is willing to do anything to help our economy get through this tough time. Interest rates at 1% wasn't really the problem, rather the problems appear to be credit defaults and the housing mess, as well as corruption and the lack of transparency in our financial system. Interest rates at 0 isn't a long term solution, but I understand why the Federal Reserve made such a move for now. Let's hope the job market rebounds so our economy can get back on its feet.