Can the Federal Reserve Keep Lowering Rates? Should It?

Today, the Federal Reserve is set to announce further interest rate cuts. Most economists and strategists predict that the Fed will lower rates by .5 percent to make interest rates just 0.5%. The Federal Reserve is clearly trying to do all it can to stop the sharp decline that is underway in the United States economy, as can be seen through the jobs reports each month. The problem the Federal Reserve will end up having though, is how much lower can they go with rates? Is it a good idea to have rates at virtually 0 for such a long time?

The pros of cutting rates

- Low rates tend to give people a better reason to spend and with consumer spending at such a low level, that is certainly necessary at this time.

- Low rates can also be good for morale of the stock market. When the market knows that the Fed is doing everything it can to curb the recession it tends to behave better.

The cons of cutting rates

- Though it is something that is often overlooked, cutting interest rates can hurt those who are doing well with their personal savings in instruments such as a certificate of deposit. After the Fed cuts rates again cd's are likely to be yielding very low percentages. It's ironic that those who are being responsible and putting their money in an FDIC insured account will suffer.

- In the long term these kind of low rates have caused significant problems in the past. In fact many blame the housing bubble on the fact that rates were kept too low for too long. When people see rates like these they tend to overstep their boundaries and then it comes back to bite them.

The bottom line is the Federal Reserve must continue to work in all the ways it can to stimulate our economy, which is deep in the doldrums right now. It will also be important that in the comments that the Federal Reserve makes in the coming days that they assure investors and consumers that they do indeed have ammunition to use to combat this recession. The Federal Reserve as well as all the other branches of government will need to work together to use all the tools necessary, even if they have never been used before, to stimulate this economy and get people back to work.