Wednesday, October 3, 2012

Need to Ask Again - Why are interest rates being kept at a low level?

According to the Federal Reserve the interest rates are being kept low for the following reasons: 
        To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens... Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses. (

I am having difficulty accepting these explanations when reviewing the data that others report:

    1)Business loans under $1 million fell 13 percent between June 2007 and June 2011, and the amount lent has declined 19 percent when measured in inflation-adjusted terms, Federal Deposit Insurance Corporation (FDIC) statistics reveal. (
   2)For 2011, the number of reporting institutions of 7,632 fell nearly 4 percent from the number in 2010, continuing a downward trend since 2006... The total number of originated loans of all types and purposes reported fell by about 780,000, or 10 percent, from 2010, in part because of a 13 percent decline in refinancings. Home purchase lending also fell, but by a more modest 5 percent. (
  3) ...through Q1 2012,  the total household net worth climbed quarter-over-quarter to $62.9 trillion. That's still something of a drop—about 5 percent compared with $66.2 trillion in 2007. ( (emphasis added)

The reports of above do not support that lower interest rates helps households and businesses. So I look at the impact on unemployment for a justification - Does a lower interest rate correlate with an increase in employment? Wanting to be fair, I used ten years worth of data from the Bureau of Labor Statistics and the Federal Reserves effective Federal Fund Rate reports to seek a correlation. Below is a chart with these average annual statistics for each - 
Unemployment doesn't appear to decrease with lower FFR
Looking at the chart for years 2005, 2006, and 2007 - it indicates that unemployment was decreased when Fed Fund Rates were rising. In 2008, the Fed Fund Rate lowered and the unemployment rate increased. In the following years (2009-2012) the interest rates have remained the same and the unemployment varied slightly. The ten year overview comparison of annual data does not indicate a correlation between lower Fed Fund Rate and lower unemployment. In fact, one could present an argument that there are indications of the opposite impact when looking at the chart. 

It appears that, there are fewer business and home loans being made, household values fell 5% since 2007, and the unemployment rate correlation is questionable. So, I have to ask again, Why are interests being kept so low?