Federal Reserve to Keep Lending Rates at Historic Lows
The Federal Reserve announced plans Wednesday to keep lending rates at near zero percent as it aims to continue pumping liquidity into an economy in recession. According to The Huffington Post, the central bank will continue purchasing $45 million worth of U.S. Treasury bonds each month until the national unemployment rate drops below 6.5 percent.
In setting a benchmark threshold, the Fed has essentially stated that its primary gauge of economic health, above any other indicator, is the unemployment rate. From September to October 2008 the national unemployment rate grew from 6.1 to 6.5 percent and has remained above that threshold for more than four years.
Judging by rough forecasts of the next 12 months, we should not expect to see the unemployment rate drop below the Federal Reserve’s benchmark for at least another year.
The Fed also announced that it would continue its program of purchasing $40 billion worth of mortgage back securities, bringing the sum total of monthly spending to $85 billion. This is precisely the position the Fed was in before its announcement.
Despite the fact that chairman Bernanke’s big announcement was to simply uphold the status quo, the signal that the Fed buying program has a directed purpose is important. The United States cannot afford to simply create new money in perpetuity. By setting a clear goal of 6.5 percent unemployment the Fed is showing that its emergency stimulus measures are primarily aimed at repairing the economy up to the point of the financial collapse of October 2008.
The economy had been in recession long before the financial collapse. Unemployment rose steadily from August of 2007 until the American Recovery and Reinvestment Act of 2009 staunched the bleeding in November of that year. The Federal Reserve has not given itself a mandate to maintain high liquidity until the country gets back down to a natural level of unemployment. It is only interested in stimulating the sector it occupies- finance.
The Fed program will dry up if the United States economy does get back below 6.5 percent unemployment in the next year. In that case, the economy will still be in need of support; 6.5 percent unemployment would have been shocking in the 1990s, and a 5.4 percent unemployment rate was used as ammunition against President Bush in 2004.