Fed Action

Posted: October 17th, 2013





Fed Action

The decision by the fed to purchase agency mortgage-based securities at $40 billion each month is intended to spur economic growth by increasing the rates of employment, and by reducing the interest rates. The fed will only review its decision once it sees signs of economic growth. Central banks use interest rates as a way of regulating the economy. The interest rates affect the rates of mortgages that people have to pay, and it determines the rates at which people borrow money. High interest rates discourage borrowing since it means that people have to pay more for the loans they have taken. On the other hand, low interest rates encourage borrowing and increase spending. The government’s decision means that it has to print more money to buy the bonds. By increasing borrowing, the government hopes that it will increase spending, and that this will in turn increase hiring opportunities, as people take more loans to create businesses. Although low interest rates are an incentive for people to borrow money, other factors affect contribute to this decision, including increase in wages and the current economic situation.

Fed’s decision will ultimately decrease the interest rates, but it is doubtful whether this decrease will lead to economic growth. Banks will be more willing to increase their lending rates since they are assured of more money in their accounts (Hilsenrath and Peterson). Some people argue that quantitative easing by the government will only benefit a few individuals. They argue that people do not borrow because of low interest rates, but that their decision to borrow stems from the fact that they see an opportunity of doing so. Therefore, for many individuals, interest rates are not an incentive for borrowing. The only thing that will compel them to borrow is if they experience an increase in real wages, which will give them more confidence that they can pay their loans.

Many people are paying off debts, which they have held for a long time. Many of them will not consider borrowing as a wise move, seeing that they are facing financial crisis. In addition, some people have lost their jobs, and borrowing money is not the first thing that they will consider. Some people would consider borrowing money in an economy that supports job creation, and in a stable economy. However, they are afraid of borrowing if they think that the economy will not help them support and sustain their businesses. The low interest on mortgages will only help the housing and construction industry. While low interests on mortgages make home ownership cheaper, other factors contribute towards making the decision to purchase homes.

The economy cannot grow while depending on a single sector. The fed’s decision will only benefit the housing and construction industry. Several people will benefit if the housing sector improves since they will get jobs. This will also improve and enhance job creation in other related industries. However, these jobs are not a true reflection of the country’s economy, since they will not translate to an increase in jobs in other sectors. The decrease in interest rates might discourage some investors. The investors will feel that they are not getting real value for their money, and they will be reluctant to invest in the country. This will decrease the chances of the country getting more jobs. Moreover, some investors can decide to pull out of the country, and they can decide to set their jobs elsewhere, where they are guaranteed returns. This decision will mean that some companies will relocate to overseas, and this will lead to job losses.


Works Cited:

Hilsenrath, Jon and Kristina, Peterson. Fed Acts to Fix Job Markets. Wall Street Journal. 2012. Web. 18 October, 2012

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