In the article, Why are Rates so Low and for How Long?, I discussed the two economic reasons the Fed is keeping the target rate for the Federal Funds Rate so low.
1. To encourage businesses to borrow and expand so that they hire more workers.
2. With inflation being reasonably low, they don’t have to raise the Target Funds Rate to curb inflation.
Just a simple review on how the interest rates that you are charged or earn are influenced. The Federal Reserve Bank (The Fed) sets the target rate for the Federal Funds Rate. The Federal Funds Rate is the rate in which banks lend to each other overnight. While the Fed can’t directly set the Federal Funds Rate, they have several tools in there arsenal to strongly influence rates; such as changing the money supply in the economy. In turn the Federal Funds Rate influences the rates that banks charge for loans or pay on deposit accounts.
Aside from the high unemployment and relatively low inflation, there is a third incentive for the Fed to keep interest rates low. That is the high national debt! Just like the Federal Funds Rate impacts what rate we pay on our debt or earn on our savings, it also impacts the rate which the U.S. government pays on it’s debts. There is a lot of speculation on how much the nation could even sustain itself if rates went up and the U.S. had to pay higher rates on it’s debt.
While the low rates are good for borrowers; savers and bond investors are feeling the pinch. In addition, the national debt should be a concern for all.