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Low Interest Rates Having No Effect on Economy

Interest-Rates / US Interest Rates Jul 03, 2012 - 03:38 AM GMT

By: InvestmentContrarian

Interest-Rates

Danny Esposito writes: The Federal Reserve is frustrated that its low interest rate policy and thus low mortgage rates are having no effect on the U.S. economy. The Federal Reserve was hoping to stimulate borrowing to get the U.S. economy growing again.

The problem is the record number of people whom are long-term unemployed: 5.4 million were unemployed for longer than 27 weeks as of May.


There are over 80.0 million Americans who are not even counted as unemployed because they are discouraged when it comes to finding a job in this economy.

With no available jobs and the housing market continuing to languish at the low end, it doesn’t matter how low mortgage rates are. Also, because of the reality of the jobs market, the Federal Reserve is well aware that more and more Americans fall into the category of poor credit scores.

Banks and mortgage companies in the U.S. are very hesitant to lend, because they are still healing from the crisis. Regardless of how low mortgage rates are, they are tightening their lending standards to protect themselves.

The Federal Reserve should pay attention to a report from Moody’s Analytics that noted 90% of new mortgages in 2011 were given to people with only high credit scores.

There is no question that those with high credit scores are taking advantage of Federal Reserve policy to refinance and borrow. The problem is Americans with low credit scores are finding they need to pay much higher mortgage rates than what the Federal Reserve intended.

The other issue is that those Americans who had their credit scores cut down due to the ramifications of the financial crisis are finding it almost impossible to refinance, let alone trying to borrow money at very low rates.

The Federal Reserve conducted a survey itself to assess the situation. It found that over 80% of banks would not provide a mortgage period, irrespective of mortgage rates, to lenders with low credit scores.

So while the Federal Reserve is trying its best to lower the cost of financing in order to stimulate the economy, the low interest rates and mortgage rates are not getting to the people who need them most.

The Federal Reserve understands that the U.S. economy will not grow as fast, and that means society will clearly be delineated by the haves and the have-nots.

Monetary policy from the Federal Reserve is only part of the solution. Fixing the structural problems of high unemployment and a distressed housing market requires fiscal policy from the White House. That is the only way the U.S. economy has a chance of returning to the days when wealth and opportunity were more evenly distributed.

Source: http://www.investmentcontrarians.com/debt-crisis/low-interest-rates-having-no-effect-on-economy/264/

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

Copyright © 2012 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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