http://www.washingtonpost.com/business/economy/european-central-bank-raises-interest-rate-over-inflation-fears/2011/04/07/AFtgWquC_story.html
The European Central Bank raised interest rates to 1.25%. Many analysis are saying that the United States Federal Reserve is behind in their contractionary policy and should hedge against inflation. Also, the fact that currently there is no room for the fed to lower interest rates should another crisis occur. If you know anybody considering buying a home (and can get a loan, a big if considering the loanable funds market) The time is now when rates are at historic lows and prices are currently in the gutter in terms the last 30 years approximately.
How do we as a class feel about increasing interest rates in the united states which will ultimately lead to higher interest rates for mortgages?
Interest rate hikes are a way of controlling growth. If you think out about the economy in terms of a wave. The government through fiscal and monetary policy attempts to make this wave as small as possible. Interest rate increases are then used to slow down growth if it "gets out of control". Increasing interest rates at this time seems counter intuitive to encouraging housing growth. But I think we need to make a decision here because current low interest rates also encourages inflation, a topic that has received a lot of press lately.
ReplyDeleteSo what would you rather have... Higher interest rates on housing which will increase the net cost of it or inflation which will also increase the price of a house?
My understanding of the recovery so far is that business activity is recovering well, it's the jobs that aren't returning. 2010 GDP was up 2.9%, after a 2.6% contraction in 2009. Profits from corporate production were up 29% for the year. (http://www.bea.gov/newsreleases/national/gdp/2011/gdp4q10_3rd.htm)
ReplyDeleteProfitability and cash flows have returned, and money is flowing back into credit markets. In this situation the Fed should raise its interest rates. One good reason is so they have room to bring the rates back down in the case of a new dip.
The recession caused companies to restructure, and they are now achieving growth disproportionate to hiring. In such a situation pure growth will not drive job growth while the danger of becoming too credit-dependent is still with us if credit remains too cheap.