Low US job growth could extend low interest rates

By Michele Lerner

The U.S. Department of Labor's monthly jobs report, released on Sep. 2, showed zero job growth in August. The unemployment rate stayed at 9.1 percent in August. The Obama administration said it anticipates unemployment to remain at that level throughout 2012, according to The New York Times.

According to The Washington Post, the Labor Department's jobs report from Sep. 2, when considered with employment reports from previous months which were revised downward, means that the job creation has been too low for at least four months to improve the unemployment rate.

Continuing weak economic reports in August led the Federal Reserve to announce that interest rates would remain low into 2013. The Federal Reserve has kept short-term interest rates near zero since December 2008, which means that interest rates on CDs, money market accounts and savings accounts have also been low. The Federal Reserve sets a target interest rate for the federal funds rate, which is what banks charge each other for short-term, overnight lending.

Federal Reserve options

The Federal Reserve, set to meet Sep. 20 and 21, is considering further steps to stimulate the American economy and avoid another recession. According to The Economic Times, the Federal Reserve is taking steps to lower long-term interest rates in addition to short-term rates.

Economists are speculating on how the Federal Reserve might do this. Some think the Federal Reserve will sell off the U.S. Treasury securities it owns that are maturing soon and then begin buying Treasuries that mature later. This would increase demand for longer-term Treasury bonds, causing prices to rise.

As the Treasury bond prices rise, their interest rates fall. Since many bank rates for consumer loans and mortgage loan rates are tied to the Treasury rate, those interest rates would fall as well. These lower interest rates could help stimulate the economy because businesses would be able to borrow for investments at a lower cost.

According to The Washington Post, one hoped-for impact of lower long-term interest rates would be a jump in the number of homeowners refinancing. If more homeowners refinance, they would then be expected to spend more on other items, boosting the consumer spending impact on economic activity. However, with so many homeowners having little or no equity in their property, a massive wave of refinancing may be less likely to occur.

Impact of low interest rates on savers

While the Federal Reserve's intent in keeping short-term interest rates low is to improve the economy, some economists believe the long stretch of near-zero interest rates has actually damaged the economy. According to the Associated Press, interest income from savings accounts, CDs and money market accounts dropped by 27 percent from 2008 to 2010. A drop in savings income generally is linked to reduced consumer spending. According to the Federal Bureau of Economic Analysis, interest income dropped from $1.4 trillion in 2008 to $1 trillion in 2010.



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