A few days before its actual implementation, Chairman of the Federal Reserve, Ben Bernanke, says that the fiscal cliff is already hurting the economy. It was earlier reported that several key players of the economy have already pulled back their investments. Small business owners express no plans of expanding while big companies refuse to spend. As a result, the unemployment rate remains low.
Although he believes that the crisis can be resolved without having long-term damage by striking a good budget deal, the short-term effects can still be quite devastating. So the Federal Reserve plans to help ease the tension by trying to boost economic development while driving unemployment down. This will be made possible by fueling banks with cash.
Fed to Keep Short-Term Interest Rate to Almost Zero
A meeting at Washington has sealed the deal for the Fed. It was agreed that the Fed will keep the short-term interest rate of loans to almost zero. This very low interest rate ought to fuel the cycle of borrowing and spending, which would later on push economic growth. To do this, the Fed will pump banks with $85billion a month. However, the Fed has one condition: they will only keep doing this if the unemployment rate is above 6.5 percent and the inflation remains steady.
In addition, the Federal Reserve promise to keep buying bonds in order to support the growth of the economy.
Is There Going To Be a Repeat of the 2008-2009 Recession?
It must be remembered that a separate report has pointed to the lending frenzy as one of the causes of the 2008-2009 recession. What happened was the Federal Reserve also pumped banks with money while keeping the interest rate really low. This led to banks forgetting about their guidelines and advancing cash to borrowers who do not really fit the bill.
But then the Federal Reserve suddenly stopped its flow of cash and the interest rates went back to normal. This led to banks getting really high default rates that the government had to bail them out again. Stricter measures were enforced, lawsuits were filed but then again, a lot of money was still lost.
Consumers also have their own stories to tell because their credit scores got really low that borrowing from traditional institutions became almost impossible. As the next best alternatives, online lending firms offering bad credit loans proliferated.
Aware of this fact, the Federal Reserve has stated that if the risks of increasing their participation in supporting the economy will outweigh the benefits, then a modification to their purchase program will be in order.
Bernanke: Congress Needs to Work on the Issue Now
The possibilities of another recession are reasonable and they can really happen anytime. The implementation of budget cuts and tax increases is like walking on a slippery slope – you can fall anytime. But again, Bernanke said that it could work as long as the congress works on the issue now.
But with the year coming to an end, the Congress is about to convene. Can they reach an agreeable budget deal before the start of the Holiday break? That remains to be seen.