Fed Says Interest Rates will Stay ‘Exceptionally Low’ Through Mid-2013

By David S. White

Principal of David S. White & Associates, a real estate and general business law firm, West Los Angeles

Wed, August 10th, 2011

Tuesday brought news from the Fed that interest rates will stay near zero until mid-2013, due to “considerably slower” growth than expected.  Accepting that growth will not come quickly now, the Fed also commented: “The committee now expects a somewhat slower pace of recovery over the coming quarters,” and “The unemployment rate will decline only gradually.”  The Fed did not act unanimously, as it usually does, however, and these comments, eagerly read by the financial community like one would read tea leaves or the entrails of a chicken, in times past, were the product of a 7-3 vote.  The three dissenters are concerned about inflation rearing its head once again.

We are running out of the usual tricks which have been employed in past recessions and depressions to jump start a sick economy like applying those electrical paddles to a patient whose heart has stopped it’s steady beating.  The Fed has decided to keep federal funds at zero to one quarter percent, which is practically free money for those who receive money directly from the Fed.

The hope, among other things, is to stem the tide of a US stock market in near free-fall, having so recently lost well over a thousand points on the Dow, meaning trillions of dollars lost from pensions, 401k’s and all others who have made market-dependent investments.  Wealth has again vanished without a trace – not so much as leaving ashes or skid marks in its wake.

Keeping interest rates at near zero (not zero to you and me, mind you) for the next two years, and announcing that now, is a nearly unprecedented acknowledgement that the economy has truly hit the fan, punked out, and has nearly been given up for dead as collective breaths are being held over whether or not we will be entering a W-shaped, Double-Dip Recession. 

“Flattening,” “weakening,” and ‘housing is depressed’ are the kinds of descriptions the Fed used.  Brazil is slowing down; Europe is having banking problems; even China, who must keep buying our Treasury paper (like an addict needs their drugs) in order to keep their own Yuan from inflating wildly and to continue their tsunami of exported goods, is showing signs of overheating.  The EuroZone, which has a greater GDP combined than the US, is being dragged down by the woes of the PIGS countries – EuroZone countries of southern Europe: Portugal, Italy, Greece and Spain.   Our Summer of Economic Discontent seems like it will last forever.

We can cut, cut and cut some more, but the kind of growth that we need will not occur without real, purposeful job creation on a massive scale.  We have not made the serious and creative efforts, of which we are quite capable, to think our way out of the job creation Catch 22 which resulted from outsourcing and the decline of US manufacturing – how about job sharing, job re-training, internships for mature workers and some really creative thinking put to work here?  This is a bi-partisan issue; it must be – unseating the current President cannot be the only goal of the party out of power in the face of this three-plus year economic storm which affects every single one of us now.  Our infrastructure is truly crumbling and millions are out of work – a WPA-type project to re-build our infrastructure would employ many, and is long overdue.  Also, it is high time for a Manhattan Project-style project to create new energy sources for our future – put 5,000 top scientists somewhere and give them what they need so that they can concentrate on creating the 21st century energy technologies that will free us from our dependence on foreign oil obtained at increasingly higher prices from countries who won the geographic lottery and who truly hate us.  We suffer neither a debt crisis nor a lack of money – the former could be paid with a healthy GDP by a nation with as strong fundamentals as we enjoy; the latter is about money sitting on the sidelines because the owners of that money are seriously troubled about where we are heading, and with good reason. 

Historically, interest rates over the last couple of hundred years have been set either by national governments or central banks.  Since the Eisenhower Presidency, the US Fed’s federal funds rate has fluctuated between roughly 0.25% to 19%, from 1954 to 2008.  Some may remember the high 19% end back in the early 1980’s, when conventional financing rates for real estate painfully exceeded 20%, for a time – some may even have purchased their first real estate back then, cobbed together with seller-financing and wrap-around mortgages.  Today, if you can qualify for the loan (and, that’s a big ‘if’), real estate loans have not been offered at lower interest rates since Ike promised to bring the troops home from Korea.   Setting and overseeing interest rates is serious business.  When control is lost, the result can be the kind of out-of-control hyperinflation that we saw in 2007, when the Central Bank of Zimbabwe increased their interest rates to 800%!  Or, even worse, what the Weimar Republic experienced after WWI in Germany, where, at it’s worst hyperinflation, 1 million mark notes were used as scratch paper and the 50 million mark banknote, issued in 1923, was worth about $1 US when printed, but this 50 million mark amount only nine years before would have been worth some $12 million – unimaginable.

But, while we have a healthy fear of hyperinflation, and well we should, our problem is not that – we are facing the prospect of real deflation, a Lost Decade (like Japan in the 90’s), and almost no growth, in an economy which must grow yearly just to keep up with population growth.  Economies don’t grow if people don’t spend; people who are out of work don’t spend, and those who have jobs are afraid to let the money go during times like these.  Businesses are afraid to expand and invest.  Putting America back to work is absolutely critical right now.  Cutting spending does not revive a swooning economy; jobs do.