U.S economy recession question?

Question

Although the US economy might be in even worse shape at the present time if the Fed had not reduced its Fed funds target between last August and this April from 5.25% to 2.00%, most economists believe that we are very close to or already in a recession. Why have the Fed’s rate reductions not had a more powerful affect in preventing a recession?

Answer 1

Interest rates aren't working now.  One big reason for it is because people are already very hurt by current problems and interest rates being lowered won't help much.  Lowering rates was supposed to help homeowners with mortgages (esp those with ones they couldn't pay back) and in theory, would spark more home buying.  However, today the market was already weak enough and too weak for an interest rate reduction to have a big impact.  Furthermore interest rate lowering have led to economic problems.  Specifically, inflation has risen thanks to a lower interest rate.  With more money in the economy, value of it has gone down and prices have gone up.  The FED can't lower interest rates more because that would create more inflation-- and we aren't in a recession now but we definitely could go into one later this year (b/c we still have good GDP growth..but could fall into one and then get better).

Answer 2

First, interest rate affect the economy with a lag of a year or more. Second, more money causes inflation not GDP growth.

Answer 3

The fact that you can borrow money cheaply does not compel anyone to do so and employ it productively.