Tuesday’s financial news supports the view that world financial markets care more about the overall economy than whether the US credit rating was downgraded. After the huge stock sell-off on Monday, markets were up and down Tuesday until the Federal Reserve Board announced that they will keep interest rates at their current low level until the middle of 2013. Stocks made a big rally immediately following the announcement.
All my sources said this was a historic move, that the Fed has never before set a specific time frame. Their usual phrases include “short-term” or “for an extended period”. Tuesday’s announcement creates confidence and stability. For two years businesses will be able to plan expansions knowing the costs of borrowing the needed capital.
Continuing the low interest rate is also good for those getting a mortgage or borrowing money for other reasons. One cynical friend said that it may also be good for President Obama’s re-election bid.
Of course, there is a down side too. Prolonged low interest rates do not motivate the average American to build up their savings. Earning one percent or less, even on deposits over $10,000, is discouraging.
But overall, this move by the Fed should help our economy.
In somewhat related news, Majority Leader Harry Reid has filled the three slots for Senate Democrats on the Congressional Super Committee. Knowing little about Sentors Patty Murray and Max Baucus, I have no opinion on their appointments. But I was disappointed to hear that the third appointee is Senator John Kerry. He appeared on one of the Sunday political news shows and blamed the entire credit downgrade on the conservative Tea Party members of the House.* This is not the open-minded attitude required for this committee. Members need to truly listen to each other to come up with a proposal that can pass both houses of Congress.
* See previous post for comments on this attitude.