Fed’s Target Rate versus Banks’ Deposits and Loans Rates

Abstract

The paper analyzes the recent economic crisis and the Fed’s monetary policy used to relieve the recession and improve the economic growth. The latest target rate (monetary policy) is closed to zero since December 2008 with a new experimental policy (“quantitative easing”) to invigorate aggregate demand (investment, consumption, growth, and employment). This zero interest rate policy has reduced the deposit rate to zero and has affected negatively savings. It has eliminated the incentive to save and has made savings almost negative (dissaving or borrowing)and has contributed to this slow growth of output and persistent unemployment. This policy hasmagnified the debt of individuals and the low taxes on businesses have augmented the deficits and the debt of the country. The deposits rate has to cover at least the official inflation rate and an interest rate ceiling on loans must protect the borrowers from the high loans rates, especially the credit cards outrageous rates. The government must increase corporate taxes and reduce the national debt by lowering government expenditures (military expenditures), by restraining inefficiencies and corruption; but, increasing public investment. The public policies must be mixed policies to improve production and employment first and then to control inflation and interest rates. The current one-sided monetary policy and the abandoned fiscal policy need to be changed and become more effective, which are necessary to improve the nation’s welfare, fairness, equity, solidarity,justice, and to benefit the neglected middle class in our society. The middle class cannot work only to pay taxes and interest on its debt (redistribution of its wealth), due to low disposable income, negative savings, high unemployment, and unfavorable public policy. The country needs to correct its structural problems.