Trends in Interest Rates in 2014
The Fed’s likely to keep QE3 (Quantitative Easing #3) in place longer
Janet Yellen, the new chairwoman of the Federal Reserve will most likely continue the “easy money” policy established by of her predecessor, Ben Bernanke, and will continue printing money under the QE3 plan. Yellen will slowly reduce the amount of new money added to the market in order to keep interest rates low and help boosting the very slow economic recovery. Yellen highlighted how low interest rates have boosted the housing recovery, a trend that’s been “broadly beneficial” for the economy. This is consistent with research conducted by well known economists which shows that home prices have had a greater impact on the wealth effect than stock prices. Given this sentiment, the Fed may continue the purchases of short term bonds even after it begins to taper government securities purchases.
In addition, Yellen is interested in lowering the unemployment rate by maintaining pricing stability and by keeping the inflation rate near 0%. This will hopefully improve the employers and consumers confidence in the economy, resulting in increases in household spending on goods and services and in employers hiring rate.
What has happened
In many areas, the economy hasn’t returned to its pre-Great Recession levels. The number of Americans who have been out of work for a long period of time remains above 7% since 2008. That’s one of the reasons the Fed must maintain a highly accommodative monetary policy and slowly ease off the QE3 plan.