Interest Rates Could Remain Low for a Long Time

All indications are that there would not be any serious interest rate hikes in the near future. The unemployment rate is still quite high and there is no hint of inflation rearing its head. These should be good enough reasons for the Fed to keep interest rates low for a long time, and the view is supported by many monetary policy makers and prominent economists.

According to Charles Evans, the President of the Federal Reserve Bank of Chicago, there is no fear yet that sustained low interest rates would harm price stability in the economy. He said that with unemployment still lingering above the 9.5% mark, it would not be prudent to take any measures, like an interest rate hike, that could derail the economic recovery.

Evans said that there is still a lot of reluctance among both households and businesses when it comes to spending. Although the economy grew rapidly in the last quarter, consumer spending needs to increase significantly for the recovery to be sustainable. And one of the best ways of doing that is to keep interest rates low.

Another important issue that Evans raised was that among those who are unemployed right now, about 40% have been out of job for more than six months. Long term unemployment is particularly worrisome because when workers stay out of job for a long period, they start to lose some of their important skills and it becomes increasingly difficult for them to find a new job.

Recently, Ben Bernanke, the chairman of the Federal Reserve had also echoed views very similar to those of Evans. According to Bernanke, the economic recovery is still in its initial stages and there is no reason to believe that inflation is going to be a problem anytime soon.

Some economists and people from the financial industry have raised concerns that keeping interest rates low for prolonged periods could end up building serious inflationary pressure in the economy. High inflation coupled with a high unemployment rate could spell serious trouble for many households across the country as their spending power remains low while the cost of essential goods keeps increasing.

Keeping inflation in check is one of the most important duties of the Federal Reserve, and the final decision on rates lies with Bernanke. There is no doubt that the Fed will have to make some difficult choices, at least for the next few months.

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