Has the Fed acted correctly on interest rates?

by Scarlett Vasquez
Money Rates Columnist
October 07, 2013

The Federal Reserve has been a central contributor to the sad state of savings account and CD rates in recent years. In wrestling with the worst economic crisis since the Great Depression, the Fed has done virtually all it can to keep interest rates near zero since 2008. This approach has come at a clear cost to savers, but what would have happened if the Fed hadn't intervened?

To provide insights, these professors answered the question:

What state would the economy be in if the Fed hadn’t acted to repress interest rates?

Calvin Blackwell, College of CharlestonCollege of CharlestonCalvin Blackwell, Ph.D., Associate Professor of Economics at the College of Charleston in Charleston, S.C.

My sense is that Ben Bernanke’s response to the Great Recession has been more beneficial than harmful. One can argue that in Alan Greenspan’s final years, the Fed did more harm than good, but I don’t think that claim can be made about the Fed under Bernanke. If the Fed had not intervened to lower interest rates, I suggest the recession would have been much more painful. It is debatable whether the Fed’s actions extended or shortened the recession, but I have no doubt that the economy would have contracted further without the Fed’s actions.

Phillip Rothman, East Carolina UniversityEast Carolina UniversityPhillip Rothman, Ph.D., Professor of Economics at East Carolina University in Greenville, N.C.

It’s a cliché by now, but I agree with the assessment that Bernanke’s post-Lehman policies both with respect to the fed funds and early quantitative easing helped prevent the Great Depression 2.0.

Chiou-nan Yeh, Alabama State UniversityAlabama State UniversityChiou-nan Yeh, Ph.D., Professor of Economics at Alabama State University in Montgomery, Ala.

The Fed QE operations led to low interest rates that are conducive to promoting investment and boosting the housing market. If the Fed hadn’t acted to buy $85 billion of bonds and securities per month, the Great Recession would have been prolonged and the unemployment rate would still be higher than the current 7.3 percent. The quantitative easing operations were very successful in preventing deflation, which Japan suffered during the 1990s. Now the Japanese have learned from our successful experience and implemented their own QE program.

Mark Strazicich, Appalachian State University Appalachian State UniversityMark Strazicich, Ph.D., Professor at Appalachian State University in Boone, N.C.

While it is difficult to say for sure, most economists seem to believe that the Fed’s quick action to lower interest rates and provide liquidity following the recent financial crisis helped to avert a more serious economic downturn.  I agree with this assessment.

Randall Parker, East Carolina University

East Carolina University

Randall Parker, Ph.D., Professor of Economics at East Carolina University in Greenville, N.C.

You are asking a counterfactual question that is impossible to answer. Having said that, the economy and the financial markets would have been in majorly bad shape with the unemployment rate going into the 20 percent range instead of 10 percent. Ben Bernanke learned the lessons of the Great Depression and was not going to let them be repeated.

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