Forecast of US Interest rate policy and Housing market
Abstract
U.S. economy is different from the economy of Japan. As the U.S. economy is facing the time of recession, The Fed’s interest rates have huge impact on the economic growth. Also The Fed’s decision for hiking or lowering the interest rates will affect the housing market. The economy is going through the situation of negativity which is going to be corrected with the longer period of time and not in the short run. But the economy will start getting out of debt after 2017.
Forecast of U.S. Interest rate policy and Housing market
U.S. economy is the market based economy as well as mixed economy. In recent years,
nation is facing a downward trend in the economic growth. The key factor influencing the market
is the interest rate of the Federal Reserve System. The interest rate changes have multiplier effect
on various issues in the economy; one of them is the housing market. Housing market is also
having curve sloping downwards which is going to continue for a long period of time.
The central bank of U.S. is known as Federal Reserve System, popularly known as The
Fed’s is running under the chairmanship of Ben S. Bernanke. In U.S., The Fed has the full control
over the determination of interest rates. As the economy is facing downward trend since 2005,
August 2007 was a start to interest rate cuts and the same was decreased nearly to zero with
passage of time. Interest rate cuts pumped the money into the market which is similar to the
printing of paper money and injecting into the market. This term is also known as ‘quantitative
easing’. Bernanke discarded ‘quantitative easing’ but favored the purchase of mortgage backed
securities in huge number to counter negative economic growth (Mallin, 2012).
To keep U. S. economy solvent, the interest rates are to be kept low. But the rising inflation
will put upward pressure on the interest rates. By 2014, The Fed has decided to raise the interest
rates as the short term low interest rates are positive factor for stimulating the economics growth,
but at the same time, long term lower interest rates will adversely effect the economic situation.
By 2015, U.S, debt can exceed $ 18 trillion. U.S economy now is under huge debt as
against the huge surplus in 2000. If we count from now, it will take five more years for U.S. to pay
off its debt interest rates. Weak U.S. economy may show signs of recovery after 2017 if The Fed
foregoes easy monetary policy.
If the U.S. government will increase the interest rates by 2014, then the housing market will
be the victim. High interest rates will result in low demand in the housing market as loans will be
costlier. Consequently, the property value will decline. The Fed has to resort to some other good
option other than rising interest rates to maximize the economic growth.
During 2005, there was a boom in the housing market of U.S. The housing market
witnessed crash during recession in 2007. It lead to the unemployment and lesser income with the
public. With less purchasing power, there was a big hit to the housing industry to the consumers as
well as the sellers. This further resulted in lesser supply of homes and the sellers were not able
to sell the homes in the market because of lesser value of homes as compared to their cost.
There is a close relationship between the interest rates and the housing market. If the
interest rates are low, then consumers can easily take credit from the banks and invest in the
housing industry. But if the credit is costlier, then the investors will shift to the stock market
instead of investing in homes. The public will be inclined towards investing in future insurance
policies for their old age rather than investing in homes.
The housing market will continue downward sloping till 2015 and may recover after 2017
after achieving equilibrium in the interest rates by the U.S. government. U.S. economy is the
backbone of the world. A large number of economies are dependant on U.S. economy for different
products as well as technology. The economy is a very strong economy and has never noticed
double dip in the economy. The same will be continued by the government and will illustrate
positive picture to the world around 2017 (Jones, 2007).
References
Online Newspaper Articles
Mallin Jay. (2012, April 27). Federal Reserve (The Fed). The New York Times. Retrieved from
Article Retrieved from a Database
Jones Med. (2007, March 15). U.S. Economic Risks and Strategies for 2007-2017, International
Institute of Management. Retrieved from http://www.iim-edu.org/u.s.economyrisks/
