Why Can't the Federal Reserve Keep Interest Rates Low to Support the Housing Market?

When housing markets perform exceptionally well during periods of low interest rates, it's common for many to question why the Federal Reserve doesn't keep interest rates at these levels. This article explores the multifaceted reasons behind this, emphasizing the Fed's primary mandate, the impact of long-term interest rates, and the broader economic context.

Role of the Federal Reserve

The primary objective of the Federal Reserve is to manage inflation and promote maximum employment within the United States. Supporting the housing market is not part of its mission, despite its apparent importance to many individuals and communities.

Manipulation of Short-Term Rates

The Federal Reserve has the ability to influence short-term interest rates, which typically affect other interest rates in the financial market through a series of transactions. However, the long-term interest rates, particularly those affecting mortgage rates, are beyond the influence of the Fed. These are determined by supply and demand in the market for government bonds and are influenced by a wide range of factors including economic growth, inflation expectations, and the overall health of the global economy.

Historical Context

Until the 2007-2008 financial crisis, low interest rates were seen as a potent tool to spur economic growth. During such periods, reducing short-term rates could accelerate inflation and economic activity, while raising rates could slow down the economy and reduce inflation. However, the post-crisis era has seen a different dynamic.

Current Economic Conditions

Following the 2008 crisis, government debt levels significantly increased, surpassing 100% of GDP. As a result, the economy has largely been supported by low interest rates, pushed near zero by central banks. This prolonged period of low rates has benefited the real estate market but also raises concerns about the underlying economic health and potential issues in other sectors.

There are worries that if the real estate market overheats, as it did in the early 2000s, the Fed may not be able to raise interest rates in response. This is due to the high debt burden and the reliance of many economic sectors on low-interest rates. Therefore, the question isn't about the Fed maintaining low rates, but rather whether it can afford to raise them, given their potential benefits.

Complexities of Monetary Policy

While the Fed has the ability to influence short-term rates, the mechanics of controlling long-term rates are more complex. Each country holds one currency, and interest rate changes have broad impacts. There isn't yet the ability to design currencies for specific types of businesses or sectors, allowing for more nuanced economic management. This could potentially be achieved with virtual currencies but presents operational challenges.

For instance, businesses might benefit from their own vendor currencies, as seen in digital platforms like Facebook and Amazon, which could offer more personalized and efficient economic support. The Fed may support such currencies if they contribute to overall economic stability and growth.

Conclusion

The Federal Reserve's role is nuanced and focused on broader economic indicators. Keeping interest rates low to support the housing market is not feasible without broader issues and unintended consequences. The future of monetary policy may see the advent of virtual currencies and tailored business currencies, providing more precise tools for economic management.