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Fed Chorus Out of Tune on Rates
By: Emily Barrett – The Wall Street Journal
The United States economy is currently in an extremely frustrating period. The market is suffering from a credit crunch because lenders have stopped lending and credit is becoming tough to obtain. Unemployment is at the highest it has been in the last four years. As if that were not enough, the housing market is struggling mightily due to the credit crunch as well as the continuing threat of unemployment. The economy has persevered to this point, but there is still tremendous risk of a recession in the near future.
Creditors are taking a pounding on existing loans caused by careless and inappropriate lending to investors with poor credit; consequently, lenders fear that they will book big losses on future loans - which make creditors reluctant to lend. A credit crunch makes it nearly impossible for investors as well as companies to borrow because lenders are scared of bankruptcies or failures to receive payments, which results in higher rates. Consequently, inflation sets in because there is a growth in the supply of money and thus the value of money shrinks. This usually results in a prolonged recession (drop in real economic growth), which occurs in accordance with a shrinking credit supply.
Labor statistics reveal the first employment decline in the United States in four years. Due to the credit crunch, businesses that can't get credit or have to pay more for capital will be less aggressive in their investment and hiring, which causes the job market to weaken. In addition to the increase in the unemployment rate, there is also a decrease in employee pay rates. This decline might lead to consumers becoming more conservative with their spending because there are fewer job opportunities and a lack of capital. Nevertheless, amid the disheartening speculation, the federal government continues to assert that consumer borrowing and credit card financing...