In the post World War II era, all the Federal Reserve Bank had to do was lower interest rates, and the U.S. economy would take off.
Since the Financial Crisis, the Fed has kept the short-term rate (cash rate) at 0%. This is very much like it’s been in Japan for at least 17 years now.
The Fed is promising no change until late 2014; many observers think the “no change” will go out to 2016. This policy is supposed to force all the other borrowing rates down, and make it easier for businesses and consumers to finance expansion.
Back in the days of 1970’s inflation, short term rates were 7 or 8%, and so was inflation. Despite what the politicians of the ’80’s said, the 1970’s were actually fairly good growth years. They were, in fact, better than the 1980’s, even though “savers” couldn’t get ahead on their deposits.
The difference of now and then seems to be confidence. In the ’70’s, businesses had the confidence to expand. Now, it doesn’t feel like businesses want to expand at all.
The Fed is doing the best it can to ramp up demand in the economy. I still think it will take Congress to funnel more money into the middle class before the U.S. can have a solid expansion. The current Congress seems to be going the other way . . .
[Update 1/27/12: The naysayers about the Fed tend to talk out of both sides of their mouths on what is going on with rates. If you look up what it costs the U.S. treasury to borrow for 10 years, or 30 years, the cost is either 2% or 3%—very low! Remember what the Treasury bond is, now: The government is promising to pay 3%, every year, for the next 30 years. Then give the principal of the bond ($1,000) back.
If people expected these low rates to create a great inflation, you wouldn’t have the government being able to only pay 3% on that long-term money. They would have to pay an amount that reflected the fact there would be this great big inflation.
If the United States were, in fact, like Greece, Spain, Ireland or Portugal, you wouldn’t be seeing such low rates bid in the market. True, the market’s appetite for U.S. debt is not infinite. But it is, apparently, quite a bit more than what the naysayers have been saying.
A lot of problems could be solved if people could just pay 2% or 3% on their mortgages or student loans. It should really be the drive of Congress to get that to happen for more and more people. Federal policies should be geared toward people being able to piggyback on the lower treasury rates.]