Seven years ago, during the darkest days of the financial crisis, the Ben Bernanke-led Federal Reserve lowered interest rates to an unprecedented near-zero range in an effort to prevent another Great Depression.
It worked.
“They helped stave off a depression and ultimately helped get the economy out of recession and back to (albeit slow) growth,” said Greg McBride, chief financial analyst at Bankrate.com.
When rates were lowered to their current 0%-0.25% range in December 2008, the unemployment rate stood at 7.3% and would eventually climb to a recession high of 10% a year later. Millions of Americans were losing their jobs and millions more were losing their homes to foreclosure.
Now, with the Fed apparently ready to raise rates on Wednesday, the headline unemployment rate stands at 5%, a seven-and-a-half-year low and well within the Fed’s description of ‘full employment.’ Economists say all of the 8.7 million jobs lost during the recession have been recovered.
The idea behind the Fed’s two-pronged stimulus policy – low interest rates combined with a massive (now ended) bond purchasing program known as quantitative easing – was simple: lower borrowing costs and pump cash into the economy in an effort to spur economic activity.
Back From the Precipice
While few would argue that the Fed’s historic foray into interventionist monetary policy was an unqualified success, especially given the slow rate of economic growth throughout this recovery, it would be just as pointless to suggest the Fed had failed in its overall mission – easing the U.S. economy away from the precipice.
The low rates have served as a key link in an economic domino effect that began with cheaper borrowing costs creating demand for goods, explained Gus Faucher, senior economist at PNC Financial Services Group. That demand helped kick-start the economy during the 2009 recession and has helped it to sputter along ever since. Consumer spending, after all, represents nearly 70% of the U.S. economy.
Faucher said cheaper borrowing costs added a jolt to a dangerously faltering economy by allowing consumers to purchase all manner of big ticket items, including homes, cars and appliances.
“It spurred a recovery in the housing market,” said Faucher. “We’re not all the way back but it’s a big positive for growth right now.”
Indeed, pending home sales, a key barometer for measuring momentum in the U.S. housing market, hit a nine-year high earlier this year and sales have hovered at or near that level ever since. And economists believe strong U.S. labor reports in October and November will only add to housing market momentum heading into 2016, notwithstanding the slight bump in mortgage rates that is likely to follow a Fed rate hike. A consumer who believes her job prospects are bright is far more likely to buy a new home than one who doesn’t.