Are Low Interest Rates Bad For The Economy? Sheila Bair Thinks So

July 5, 2013 4:16 am 3 comments

Sheila Bair, the former chairperson of Federal Deposit Insurance Corporation, feels that the low interest rate policies of the Federal Reserve will not help boost the economy.

Of late, as the low-interest rate policy has been introduced by the Federal Reserve, there has been mixed reactions from all tiers of the society. Sheila Bair, the erstwhile chairperson of FDIC (Federal Deposit Insurance Corporation), is of the opinion that rather than helping the economy, low interest rates are hurting it.

Conventionally, low rates of interest have been assisting the mortgage market of the United States to recuperate through drawing many new customers to the marketplace and enabling the existing house owners to go for refinancing of their existing loans at a cheaper rate and save money in this. The United States Federal Reserve maintained the rates of short-term lending close to nil from the year 2008 to encourage investor confidence and business expenditures.

It has been witnessed by the analysts that economic development has not been able to get back to the position where it was prior to the economic depression. The most recent GDP statement released by the government demonstrates that the economy had a yearly growth rate of 0.4% in the final quarter of 2012.

The U.S. Department of Commerce published its first appraisal of the Gross Domestic Product of the first quarter of 2013 on April 26.

The trend of mortgage refinancing has not been advantageous only for the homeowners. It also has been beneficial for all the major banks of the country, which viewed their mortgage loan businesses to reach significant highs as the common borrowers made the most of the cheapest rates. However, financial institutions like Wells Fargo and JPMorgan performed a number of surveys, which points toward the fact that the hurry for refinancing might hold back and the gains made over the past few years might be diminishing.

Sheila Bair, currently serving as a senior advisor of the Pew Charitable Trusts, said during a meeting with the Daily Ticker that the Federal Reserve’s policy to lower interest rates for underpinning the economic condition of the country went wrong.

The biggest home loan provider in the US, Wells Fargo, stated that the quantum of the mortgage loan applications received slumped 25% in the first quarter of 2013 in comparison to the number of mortgage applications received last year. Experts also expressed the view that in the forthcoming quarters, the scope for origination and marketing of housing finance products will probably be restricted. As disclosed by JP Morgan, the home loan applications it received dropped 8% during the first quarter of 2013. Industrial marketing numbers also show a 5% drop. This ultimately resulted in a slide in its revenue from mortgage banking business.

Sheila Bair debates that the purpose of the Federal Reserve is quite noble. However, it is contrary to the valid expectations. When interest rates go down, she says, the motivation for investing also goes down.

The fiscal policies of the Federal Reserve are causing significant problems for the banking institutions to enhance their revenue. As a result, they are compelled to look for gains through other methods, Bair opines.

Originating a loan with an extensive duration against a nominal interest rate is gradually becoming very difficult for the lenders. It is not at all feasible as far as commercial lending is concerned. As a consequence, banking institutions are looking for other methods to generate revenue which include investment banking costs, profit trading, and deposit accounts. However, these techniques are not so beneficial for the economy as a whole.

Sheila Bair is of the opinion that home refinancing is not as helpful for economic resurgence as commercial lending is. The economic precedence of the country has to move to a different dimension if a complete revival is to take place.

The economic strategies of the country are extremely geared to the attempt of reviving the economic condition, which prevailed before 2007. If we have to adopt a consistent development pattern for all of us, incorporating banks, then more employment creation is necessary and inflation-adjusted wages have to improve.

According to Bair, the Federal Reserve can raise the rates. However, it should be done slowly and systematically in order that the market can adapt to it. It has been repeatedly said by the Federal Reserve that it is not going to overturn its policy till the time joblessness diminishes to 6.5%. Fortunately, the rate of unemployment in the month of March slumped to 7.6% and in the month of February, it was 7.7%.

A number of affiliates of the Federal Reserve are voicing their opinions for ceasing the lax monetary policies of the apex bank, which it is running belligerently. At the same time, the Governor of the Chicago division of Federal Reserve, Charles Evans and the vice chairperson of the Fed, Janet Yellen have disputed that the apex bank has more responsibilities for energizing the economy and raising the number of jobs.

Kevin Craig is a financial writer with various finance related Communities. He has been providing advice on finance since 2005. He has written and published several articles on different financial topics such as mortgage, debt, quick loans, credit, bankruptcy and more.

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