Fed announcement implies economic slow growth until 2013
JEREMY HOBSON: Global stock markets are still excited about what the Federal Reserve said yesterday afternoon. That interest rates for banks that borrow from the Fed will remain near zero percent for the next two years. That’s the Fed’s way of influencing the rates we pay for everything from student loans to mortgages.
Keeping rates that low for that long is unprecedented and making such a bold statement carries its own risks as Marketplace’s Jeff Horwich reports.
JEFF HORWICH: The upside of the Fed offering this level of clarity, and such a long time-horizon, is that markets like certainty. Rising interest rates are one of the feared effects of Standard & Poor’s downgrade of the U.S. debt rating — that could slow the economy down even more.
MARK CLIFFE: In suggesting that’s not going to happen, that should help market sentiment — indeed, it already has.
Mark Cliffe is chief economist with ING. He says one risk of the Fed’s announcement is that it will be taken too literally.
CLIFFE: The problem is that this is a conditional statement — this is their current assessment, this is not a cast-iron guarantee that interest rates are going to remain at zero for the next couple years. That’s the wrong way to interpret it.
Another risk is that the Fed ties its own hands — if the economy recovers faster than expected, will it react too slowly. Of course, at the moment, that might seem like a good problem to have. Perhaps the greatest downside to the Fed announcement is the reminder we could well *be* mired in slow growth for the next two years.
I’m Jeff Horwich for Marketplace.
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