Are Lower Interest Rates Always A Good Thing?
Much of Wall Street are hoping that the Federal Reserve will lower interest rates again in the near future. While many people think this will be the salvation to the woes of the financial sector, it’s not that cut and dry.
The mandate of the Federal Reserve is to achieve both price stability and maximum sustainable employment. This can be a very tricky balancing act in the best of times. Recessions will hurt in the short run but runaway inflation is something no economy wants to go through.
Interest rates affect many different aspects of our economy. While lower interest rate will spur economic growth that isn’t the only consideration. Interest rates have a large impact on exchange rates. An already weak dollar will be further weakened as lower interest rates mean our national debt is less attractive to foreign investors. A weak dollar means our exports are cheaper for foreigners and imports are more expensive for us.
In a previous article in this section I talked about high energy and food prices and whether Americans should be concerned about inflation. Think energy prices are high now? Well guess what, we import most of our oil so a weaker dollar means it will cost us even more in the future. Think food prices are high already? Well we export most of our food and you guessed it, since it will be cheaper to foreigners, demand will increase and prices will go up.
Need I remind you that our current financial crisis arose from when the last time interest rates were at rock bottom, banks and lenders awash in liquidity made many ill advised loans that are coming back to haunt them now. So while Wall Street might welcome an interest rate cut with open arms, us little guys shouldn’t be too quick to join them.
