After the Recession
Due to the collapse of the United States housing bubble and the subprime mortgage crisis that led to a recession in the US from December 2007 to June 2008, the entire financial market has had to adjust. As a result of this global financial crisis, over the past several years interest rates have been at an all time low. Creditors have made allowances for people that they wouldn’t make under normal circumstances and because of all of this America is on the road to a somewhat manufactured recovery.
Federal Reserve Steps In
Lower interest rates from the Federal Reserve reduces the cost of capital. The Federal Reserve has managed to stimulate the economy by keeping interest rates low. Theoretically, companies are able to borrow money at lower rates. This means they can use the money for expansion, buying new equipment or inventory, and hiring more employees.
Consumption is one of the main economic drivers in America. Right now, the average family should be able to enjoy a lower interest payment when purchasing a car or home. Theoretically, this should be stimulating the economy but it’s not. Millions of Americans are living paycheck to paycheck and another portion of Americans don’t qualify because their credit was injured when the mortgage crisis hit.
Generally speaking, stock prices have been on the rise. The DJIA and NASDAQ have been hitting all time highs. One could argue that this is due (at least in part) to the Federal Reserve keeping interest rates low. However, stock prices are not always a true reflection of how well a particular economy is doing. The health of any economy should be measured by other metrics such as unemployment numbers, consumer confidence, minimum wage, GDP, and other statistics. One could argue that the USA is just barely hanging on.
Raise the Rates?
Due to the fact that the economy has high unemployment, minimum wage is not going up, and consumer confidence is down, the US economy is not that healthy in many American’s eyes. Raising the interest rates now would drastically slow down the economy. Companies would not have access to affordable capital and wouldn’t be expanding, hiring, or engaging in practices that stimulate economic growth. In addition, American families are still struggling and unable to access many of the benefits of the low interest rates. Raising the rates would cause these families and businesses to struggle even more.
Is interest rate suppression an actual cause or catalyst of higher stock prices? Low interest rates are not the only reason stock prices have risen. They are higher because many companies are buying back their stocks, limiting the float, and are downsizing employees. They are artificially meeting wall street estimates. This method is not sustainable. Higher interest rates could easily cause a correction in the market and have a negative trickle down effect on the US economy.