FIRST PERSON | There’s more sobering news on the economic front as the Federal Reserve announces it will keep the discount rate at near zero for at least the next two years. The discount rate is the rate your bank pays to borrow the money it then loans to you.
The good news for consumers is that interest rates on mortgages, credit cards and other loans should remain low. Unfortunately, all the rest of the news is bad. The Fed’s role in our economy is to use the tools in its arsenal to balance out the wild mood swings to which the economy is sometimes prone. On the one extreme is inflation; on the other, recession. Economic nirvana is that magical middle ground where growth is strong and prices steady.
When inflation is high, the Fed raises interest rates, and that slows spending and checks inflation. When the economy shrinks instead of grows, that’s a recession, and it triggers the opposite action – lowering interest rates to encourage spending.
The Fed is normally reticent to make any long-term commitments regarding interest rates because this ties the organization’s hands. In the event the economy rebounds with gusto at any time over the next two years, it will be powerless to stop the rampant inflation that would follow. This is how we know the economic wizards at the Fed have absolutely no expectation of meaningful economic improvement during that time.
This news combined with growing predictions of a second recession mean that all of us are going to have to fasten our seat belts and hold on tight. With our resources already depleted from several years of slow sales, lost jobs and disappearing equity, we are ill-equipped to handle more financial challenges, but they are coming.
As a small business owner serving low- to middle-income women, I saw the effects of the last recession on my customers. I own a resale shop. Although more people are finding us – as they look for ways to save money – they are spending significantly less. Even with many more customers, sales are down. People are only buying what they absolutely need or love. Looking ahead, I see at least two more years of struggling to meet expenses, and I wonder if we will make it.
Sources:
The Associated Press, “Fed Likely to Keep Interest Rates Low 2 More Years,” NPR.org
“What is the Federal Reserve and what does it do?” ThisNation.com
Catherine Rampell, “Second Recession in U.S. Could Be Worse Than First,” The New York Times