Wall Street Journal (WSJ) About Economics, Article Review Example

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Article Review

Wall Street Journal (WSJ) reported in March that Fed plans to keep the interest rates low for years because Fed believes that the problems still persist in the labor market. Fed Chairman Ben Bernanke’s remarks were in contrast with the market’s expectation which was expecting interest rates to rise by next year. Even though job market has been improving, Mr. Bernanke believes that stronger economic growth is needed to ensure that the improvement is not temporary. But some economists such as Wells Fargo’s John Silvia oppose Mr. Bernanke’s views and fear that low interest rates may cause inflation and do little to improve job market (Hilsenrath and Peterson).

When interest rates are low, it is cheaper for business to borrow and finance their expansion and investment plans. In addition, they hire more workers to meet the expanded production activities. The businesses also face higher demand for their products which may require hiring additional workers because low interest rates also encourage consumption among the consumers. This is why Fed wants to keep interest rates low so that the public is encouraged to borrow to finance its consumption activities and businesses engage in capital investments and also hire more workers. But if interest rates are kept low for longer than necessary, they may also result in inflation because more money starts chasing the limited supply of goods and services. Thus, Fed’s goal is to keep interest rates low until economic growth and employment objectives are met and raise them if there are possible signs of inflation. Even though job market has improved, the Fed believes that the improvement is not convincing and stronger economic growth is still required to ensure this improvement is sustainable. But some economists believe that interest rates should be raised as there are signs of improvement because low interest rates won’t help solve some of the challenges in the labor market and instead may only fuel inflation.

While interest rates do help improve job market and also help economy grow, keeping them low too long may also have huge repercussions for the economy. One of the causes of the recent financial crisis was that the Fed kept interest rates low for too long which encouraged risky behavior by the financial markets in chase of higher income. Low interest rates also encouraged house purchases by people who could not afford them but were able to do so due to cheap availability of loans. The job market has shown signs of improvement and there is still more than half a year left before next year. The job market may improve even more until then, thus, Fed should not give signs that interest rates may stay lower for at least 2014 and should be willing to raise them in 2013. If Fed gives indications now, it may encourage risky behavior by lenders again who may believe interest rates to not come down before 2014. If it were me, I would adopt a flexible policy and continue to watch market conditions until 2013 before deciding whether it is time to raise interest rates or not and whether interest rates should be left unchanged until at least 2014.

References

Hilsenrath, Jon and Kristina Peterson. Fed Signals Resolve on Rates. 27 March 2012. 4 May 2012 <http://online.wsj.com/article/SB10001424052702303404704577305253971815684.html>.

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