Although largely overshadowed by the Presidential Election news cycle, the Federal Reserve made an important announcement last week, telling the public that it would keep short-term interest rates at a range of 0% to 0.25%. The Central Bank warned that the economy is still vastly underperforming its pre-pandemic levels, and it could be months or years before consistent growth returns.
Federal Reserve Can Still Do More to Stimulate Economic Recovery
The Coronavirus Pandemic decimated the U.S. economy earlier this year with slowed consumer spending and massive job losses. The Federal Reserve is ready to help support the recovery, and it believes that there are still tools available, despite already lowing the interest rate to 0%.
Chairman Jerome Powell said last week that he doesn’t believe the Fed has exhausted all of its policy options.
Typically, interest rates are lowered to stimulate economic activity. This makes borrowing more affordable for both institutions and consumers. We’ve already seen the benefits of this with more affordable mortgages and financing options right down to families and individuals.
However, with the interest rate at 0%, the Fed doesn’t have anywhere to move on this front. What it can do instead is use its vast reserves for asset purchases that help to keep the financial markets stable. Purchasing assets isn’t a permanent strategy, so if consumers don’t find confidence again, the nation could enter a difficult period. Analysts are hopeful that the holiday season will reinvigorate consumer spending, but this remains to be seen with soaring new Coronavirus cases and threats of lockdown orders in some states.
Is a Zero Interest Rate Good for Investors?
Low interest rates benefit corporations as well as consumers. With large firms having more affordable access to funding, they can invest in expansion and new initiatives to increase profits and return value to shareholders.
While many small businesses have been forced to close or limit their operations during the Coronavirus Pandemic, large enterprises have flourished. Major employers like Amazon, Apple, and Microsoft have actually expanded their operations in recent months.
Some of the best stocks on the market are still returning strong dividends, and the markets have rallied since Joe Biden won the Presidential Election (with results yet to be certified).
The Fed’s low-rate policy combined with its injection of money into investment markets is good news for investors. The economy may be uncertain today, but equities are in a good position and there are plenty of bargain and blue-chip growth options available for traders who are willing to engage.
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