Debt Debate: What Will Happen To Interest Rates?

This week has proved to be one of the most economically interesting weeks in history.  The S&P announced it was lowering the nation’s credit rating from its once stellar AAA status to a satisfactory AA rating, a first for the country. In light of the announcement, stocks plummeted and economists watched as the ripples of panic set in across global markets. To many people’s surprise, the stocks rose significantly the following day only to be followed an impending pattern of drastic waves for the remainder of the week. With such uncertainty this week the government has made one promise for stability; namely, that interest rates will remain low until at least 2013.

What Does It Mean?

After yet another policymaking meeting, the Federal Reserve announced its plan to ensure interest rates remain low for the next 18 months.  With the rate already hovering near zero, there isn’t much lower they can go. However, by not increasing the rate, the Fed hopes to encourage economic growth by reducing consumer skepticism and increasing consumer spending.

Since the federal fund rate is the key player in the lending industry, lower rates should mean more consumers borrowing.  Lower rates could mean an increase in the number of people securing loans for mortgages, cars and personal credit. Both the housing market and auto industry have suffered over the past few years; however, both have fared well and are displaying signs of recovery. Or course, the issue of foreclosure, repossessions and bankruptcy still looms as the nation continues to work together to bring itself up.

Opposition Trails Behind

Despite the lack of control over the Fed’s decision, many are not pleased by the recent announcement. Some point to the ominous picture being painted by suggesting the economy will continue to struggle for a minimum 18 months. They say the plan to keep interest rates low puts forth the idea there is no hope for economic gain and, therefore, we might as well plan for the worst.

The Fed isn’t taking this opposition lightly, as suggests that they have many “tools available to promote a stronger economic recovery.”