chart above is from the Federal Reserve of St. Louis and it is a chart of the effective Federal Funds rate. This is one of
the interest rates the Federal Reserve can directly increase or decrease at the Federal Open Market Committee meeting. Notice
the Federal Reserve started to aggressively cut the effective Federal Funds rate on January 3, 2001 when they cut the rate from 6.50% to 6%. They continued to cut the rate aggressively for
the remainder of the year. The rate dropped to 1.75% on December 11, 2001. There is a standard economic proposition that it
takes 12-18 months for interest rate cuts to move through the economy and have their maximum impact. Under this logic, the
interest rate cuts would have started to have a complete stimulative effect in the first half of 2003 which is exactly when
the US economy started to grow at a decent rate.
is there a lag time? There are several reasons. The first is consumers like to wait and see if the drop in rates is a permanent
change in Fed policy or a one time event. In order to ascertain the Fed's real policy intentions, consumers need to see more
economic data which takes awhile to come out. There is also the issue of when the Fed usually cuts rates. This usually happens
when the economy is already slowing or when there is a perception the economy will slow. When this happens consumers are simply
more risk adverse and are less likely to take out a loan.
the total amount of mortgage borrowing that has occurred as a result of record low interest rates is clear from the following
to the Federal Reserve's Flow of Funds total household mortgage debt outstanding has increased from $5.325 trillion in the fourth
quarter of 2001 to $10.143 trillion in the second quarter of 2007. In other words, US households have almost doubled their
mortgage debt outstanding during this expansion. Econ 101 explains the reasons for this massive increase in debt: when the
cost of a product is low, people buy more of it. Interest rates are the "cost of money" -- the amount it takes to borrow funds.
you add that much money to the economy, it is bound to grow. It's that simple.
no John, the tax cuts had jack to do with this expansion. Record low interest rates had everything to do with the latest expansion.
Anyone with a economic knowledge knows this. Of course, that would imply you have economic knowledge.