stimulus

3 Reasons the Fed Is Keeping Rates Low (And What It Means for You)

Brittany Lyte — Tue, 20 Oct 2015 17:17:01 +0000

The Federal Reserve has been keeping the benchmark short-term interest rate at record lows since the financial crisis in 2008. The near-zero rates are about to bust, economists say, but not until the economy shows certain signs of recovery that are so far yet-to-be-seen. Read on for our roundup of reasons why the first interest rate hike in nine years is yet to come — and what it means for you.

1. We Still Need the Stimulus

The Fed was so confident in the nation's job gains and overall economic growth at the start of 2015, that Fed Chair Janet Yellen's eagerness to raise interest rates was almost palpable. But the state of the U.S. economy has since gone stagnant. While the Fed still envisions sizable growth in the near future — the kind that could spawn higher rates — the results just aren't coming in yet. The economy still needs the amount of stimulus the central bank is providing.

For folks on Main Street, that stimulus is important. Cheaper borrowing means consumers can spend more easily, even when times are tough. For businesses, it means conditions are ripe to expand and hire new workers. But when rates finally do begin to rise, borrowing will become more expensive, which in some cases could limit job growth.

"Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy," Yellen said in July. "I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step."

2. Full Employment Remains Elusive

We're inching closer to full employment, but we're not quite there yet. What the Fed is waiting for, generally speaking, is for the unemployment rate to drop below 5%. Right now it's hovering about a tenth of a percentage point above that. When it drops, the labor market will strengthen, which will lead to price increases and wage growth. Those factors, and others, will eventually push inflation higher, creating prime conditions for a rate increase.

Full employment is achieved when all eligible workers who want to find a job are able to do so.

"Key measures of hourly labor compensation rose at an annual rate of only around 2% through most of the recovery," Yellen said. "More recently, however, some tentative hints of a pickup in the pace of wage gains may indicate that the objective of full employment is coming closer into view."

3. Domestic Spending Is Dropping

Domestic spending is the lifeblood of the U.S. economy, especially now as the nation moves toward recovery. But right now domestic spending is dropping, and that weighs heavily on economic growth. Low domestic spending can be good because it helps cut the deficit. But it also means that everyday Americans can easily feel the pinch. Transportation subsidies, funding for Head Start, and money for national parks are examples of some of the first things to drop. All told, spending on domestic programs has been on the decline since 2010, and is on track to reach the lowest level in more than 50 years by 2023.

The deficit hit a high point in 2009 at nearly 10% of the overall size of the economy. It has been in decline every year since. When the deficit does start to rise again, however, it will be due in part to the expected rise in interest rates.

What are you doing to take advantage of historic low interest rates?

This article is from Brittany Lyte of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

A Stimulating Debate That Just Might Boil Down To Perception

Fred Lee — Thu, 16 Apr 2009 15:41:22 +0000

Regardless of where you stand on the debate, one thing is for certain - no one really knows how the current tax break incentives will play out in terms of stimulating the economy. When I first learned about the Obama’s new stimulus package, thanks to the insightful reporting of our Wisebread writers, what made the biggest impression on me (maybe because it was the only thing I could understand), was the payroll tax rebate.

Under Obama’s plan, the American Recovery and Reinvestment Plan of 2009, the most tangible aspect for a working class stiff like myself was the tax break of $400 per individual ($800 for married couples filing jointly). That money, however, would be delivered via lowering payroll deductions over the course of a year.

In other words, the average consumer will be making about an additional $13.00 per week. My first reaction to this, echoing sentiments of some of my Wisebread colleagues, was a little skeptical. What, I thought, was I going to do with $13.00, and how the heck was that going to impact the economy? Wouldn’t it be more effective, as with the previous administration, to give it to us as a lump sum, so we could go out and blow it on a massive shopping spree?

Furthermore, according to a recent AP poll, most people intend to either save the money or use it to pay off debts, thus negating the goal of the rebate in the first place. So what exactly was the President thinking?

Well, like a lot of things in life, particularly economics, it seems to depend on who you talk to.

According to the Nobel prize winning economist Milton Friedman, of the Chicago School of Economics, who developed the theory of permanent income, our spending is dictated by the long term expectations of what our wealth will be over the course of our lives. Along these lines, short term changes in income (like tax rebates) should not have an effect and will not work towards stimulating the economy. For the record, Friedman was an devout free market capitalist and favored the complete abolishment of taxes while moving towards a laissez-faire economy in it’s purest form.

On the other hand, behavioral economists look at things a little differently. They try to explain the aberrant behavior of markets (the ones that don’t conform to economic models and predictions) by including emotions, as well as psychology, into the equation. In many ways it is a radical shift in thinking because, unlike classical economics, it assumes that people are not always rational in their decisions and don’t necessarily follow the logical patterns of behavior that are necessary for classical economic models to hold true.

Take, for example, credit cards. In purely economic terms, it really makes no sense to go into debt at 19% interest, while your savings are probably paying you a paltry 2% to 4%. The better idea is to pay with cash, or do without. But that’s just the tip of the iceberg. When you really get down to it, our lives are filled with examples of irrational behavior, from the intoxicating effect of sales to the lost time and expense we’re more than willing to sacrifice in order to find a bargain, even if it ends up costing us more.

So maybe there is something to behavioral economics, after all. One aspect of that pertains to the stimulus debate is the concept of mental accounting. Developed by Richard Thaler, also of the Chicago School, it states that when we receive income, we mentally “frame” it before deciding what to do with it. That perception, as well as such considerations as the source of the income and the amount, will then determine whether or not we will save it or spend it.

In other words, according to behavioral economists, our spending decisions are not based on the long term prospects of our wealth, but are instead influenced by our real-time income in the here and now. So the amount of our take-home pay will have a greater influence on our spending than the value of say, our assets.

In fact, as described in the Journal of Economic Psychology, refunds delivered in monthly installments (as is the case for a payroll tax rebate) would encourage spending more than a lump sum increase, which was found to increase savings, instead.

For some of us, it might actually strike a chord. After all, small increments in income might not be worth saving, much in the same way that small increments in price might not discourage us from upgrading our purchases. What’s a few more dollars? Then again, spread out over the entire country, it could mean a lot.

In the end, nobody can say what the end result will be, but one thing is for certain - the plan is in place, and that’s not going to change anytime soon. So for all of our screaming about the economy and whether Obama’s stimulus plan has merit or is complete foolishness, maybe the better question to ask is what exactly are we going to do about it?

This article is from Fred Lee of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Obama Eases Treasury Costs with At-Home Money Printing Stimulus

Paul Michael — Wed, 01 Apr 2009 20:57:57 +0000

Everyone is feeling the economic crunch these days, and that includes the Treasury department. It’s no news to anyone here that there has been increasing unhappiness with President Obama’s latest rounds of bailouts, but today could be a turning point for his recent negative PR. And it’s going to save the government a fortune.

Recent reports have shown the US Treasury to be in trouble financially. This from USA Today:

For the first time in U.S. history, the cost of manufacturing both a penny and a nickel is more than the 1-cent and 5-cent values of the coins themselves. Skyrocketing metals prices are behind the increase, the U.S. Mint said in a letter to members of Congress last week.
The Mint estimates it will cost 1.23 cents per penny and 5.73 cents per nickel this fiscal year, which ends Sept. 30. The cost of producing a penny has risen 27% in the last year, while nickel manufacturing costs have risen 19%.

You don’t need to be a financial genius to know that this is just throwing good money down the drain. And plans are already afoot to do away with smaller currencies and ask retailers everywhere to round prices to the nearest 10 cents. This will also stimulate more money for small business, as $2.99 will round to $3.00, giving the store or business an extra penny on each purchase.

However, a plan that is being implemented immediately is the At-Home Money Printing Stimulus. All it requires is a computer and a printer, and you can basically use your home office to print out all the money you need, with your printer being the new ATM.

Using a simple software installation, you will log into your bank account and make a withdrawal, as you would from an ATM. Instead of getting traditional cash, you will instead receive image files (PDFs) that contain the money. For those of you wondering about fraud, each new note will have a unique barcode. See sample below.

Once the barcode has been used once, it will deactivate. So, if anyone tries to photocopy the bills, they will be out of luck. The unique barcode also helps the government track your spending habits. So, if you download $100 and use it at Crate & Barrel, that information will be relayed back to a database, helping the government plan for future stimulus bills.

As almost every store has the ability to read barcodes, this new technology can be implemented straight away. Any smaller outlets without barcode scanners will continue accepting cash, checks and credit cards.

All major banks are on board, and you can download an instruction manual here. It certainly won’t be for everyone, but it’s a step in the right direction and the millions it will save the US in printing costs can be spent on paying down our national debt.

This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Economic Stimulus Bill: Will The Heavy Debt Be Worth It?

Silicon Valley Blogger — Tue, 17 Feb 2009 18:16:09 +0000

In recent weeks, I've gotten into some great discussions with people about the stimulus bill that was cobbled together by Congress last week. At one point, one of the proposed versions of the package grew to a staggering $900 billion until it was wrestled back to a relatively trimmer $800 billion. I suppose we should thank our wonderful leaders that they were somehow able to spare us the additional debt.

A lot of people are still preoccupied about where their stimulus check is, but let's look at the big picture for the moment. Now that the stimulus package details have been released, I've found many people weighing in on both sides of the debate: is the plan justified?

The Hotly Debated Economic Stimulus Bill

Some of the arguments and concerns I've read have been swirling around these points:

We need to spend for the short term. Spending is expected to take us out of the hole we're in. Many students of Keynesian economics and past history will vouch for the effectivity of this approach.
We'll be in deep debt as a nation for many generations. We are sacrificing our future and our children's future to speed up the economy's recovery. Many personal finance enthusiasts maintain this concern, as many of us are debt averse.
We need to define "stimulus". What kind of spending should this bill contain? There seems to be spending provisions here that should be part of a different kind of budget (e.g. could some of these proposals turn into "pork")? Many students of politics know that this bill can be a magnet for determined lobbyists who can spin a tale of "stimulus" into any cause they drum up.

How Effective Is This Stimulus Plan?

The hefty economic stimulus package is jampacked with provisions that try to please everyone. According to this CNN report, the big "winners" (whose piece of the stimulus pie grew larger by the final version) were in the areas of transportation, health and science whose allocations were in the multi-billions. As for us regular people, we'll be awaiting tax cuts to the tune of $400 per individual or $800 per family.

Issues With The Tax Cuts

Do you wonder whether this bill will be effective enough to resuscitate our crippled economy? Will there even be enough consumer spending done at all? Tax breaks and tax deductions are nice, but the question remains whether the general population will actually be putting that extra money to good use. Here are just a couple of scenarios that can potentially deflate the consumer spending goals of this stimulus plan. What if:

We spend the stimulus money on the wrong things. Apparently, the first wave of stimulus checks didn't really achieve its desired effect. The spending was misplaced, with reports surfacing that consumers where using the money on imports. So let's see how that works: we borrow money from foreign interests, from which we get funding for our economic stimulus checks. Then we turn around and spend the bucks on things manufactured abroad. A vicious cycle if I ever saw one.

We bank our tax credits. What if people collectively take a step towards self-preservation, and decide instead, to keep and save the money they receive from the government? Then any economic stimulation won't be coming from the consumers and those tax cuts will be for naught.

Issues With Government Spending

Well, we can at least expect that there's going to be some serious guaranteed government-funded spending. We can count on the majority of the package that's dedicated to national spending to hopefully get us out of the doldrums. Just please don't let the rumors be true that multi-millions will be going to green golf carts for government officials or to save the endangered salt marsh harvest mouse (a noble cause for a different budget).

Our debt load has ballooned to an astonishing 1.5 trillion in just a year if you add up Bush's bailous and TARP funds to Obama's bill. Maybe we should enjoy our tax cuts now while we can, because we'll be paying the financial piper for a good long while.

This article is from Silicon Valley Blogger of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Will the "Buy American" clause in the stimulus bill create or destroy jobs?

Xin Lu — Mon, 16 Feb 2009 22:06:06 +0000

Tomorrow on February 17th President Obama plans to sign the $787 billion stimulus bill recently passed by Congress. One controversial portion of the bill is a clause for the public works and infrastructure projects to "buy American". The logic behind this is that if the money in the stimulus is spent to buy American products then Americans will have more jobs. However, this policy of protectionism is sparking many fears of a global trade war. Will this clause create or destroy jobs?

Many commentators are afraid that the "buy American" clause will repeat a global trade war that occured during the Great Depression. On June 17th, 1930, President Hoover passed the Smoot-Hawley Tariff Act which dramatically raised import taxes on over 20,000 imported goods. In retaliation, America's trade partners stopped buying American goods or raised tariffs on American products. This led to more job loss in America and world trade declined by 66% between 1929 and 1934.

Before the Smoot-Hawley Tariff Act was passed, Hoover's administration received many protests from foreign governments, and a similar barrage of protests is being reported around the world right now. China claimed that the "Buy American" clause is "poison". Japan, Canada, and Australia have also expressed their concerns to the Obama administration. The language of the "Buy American" clause is now softened so that Canada, Japan, the European Union, and several other countries may be exempt from the law. However, this leaves out giant trade partners such as Brazil, Russia, China, and India. These countries contain over a third of the world's population, and if they stopped or reduced their purchase of American goods out of retaliation then the American economy will undoubtedly suffer.

On the other hand, some people believe that America has been buying too much from foreign countries. It is true that there is a trade deficit of nearly $40 billion a month as of December 2008. So the logic is that if the stimulus spent as much as possible on American products then it would narrow the trade deficit and keep more jobs in America. However, considering that the public works portion of the stimulus bill is only about $73 billion, I doubt it would make a dent in the trade deficit. Instead, it is fueling a lot of anger in many trade partners for little gain.

So will this "buy American" clause create or destroy jobs? Only time will tell and I sincerely hope that another global trade war does not happen because that would hurt everyone. So far, China has promised to avoid a similar "buy China" clause in its own stimulus efforts, and I think Americans should be thankful for that.

For further reading about free trade and protectionism you can check out these books:

Wealth of Nations by Adam Smith

The Choice: A Fable of Free Trade and Protectionism Updated Edition

Economic Sophisms

Do you exercise pocketbook patriotism by buying products made in your own country? Do you think this clause will help or hurt Americans? Feel free to leave your thoughts about this issue in the comments!

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What can you do with $13 extra a week?

Xin Lu — Sat, 14 Feb 2009 20:50:34 +0000

On Friday the 13th of February both the House and the Senate passed a new $789 billion stimulus package as a continuation of the efforts by the United States Government to jumpstart the economy. A significant portion of the package gives a tax cut of $400 to each individual worker and $800 to a couple starting in June 2009. This works out to a paltry $13 per week for individuals making $75,000 or under per year and couples making $150,000 or under per year. How will you stimulate the economy with $13 a week?

When the Bush administration gave out a $600 stimulus last year, Michelle Obama said that it "doesn't pay down every bill every month", and that "it may even feel good that first month when you get that check. And then you go out and you buy a pair of earrings". So I guess if the First Lady qualified for this tax cut she could buy about 24 pairs of $13 earrings this year.

Personally, I would apply the extra money towards my mortgage since my mortgage is fairly new and any added principal cuts down future interest significantly, but this is not the right thing to do for everyone. For those with high interest credit card debt this money is probably best applied there. However, paying off debt does not "stimulate" the economy.

In 2010, the stimulus starts in the beginning of the year so you will be stimulated by approximately an extra $7.70 a week. Eventually all of this money has to be paid back by the U.S. Government to its bond holders, and the U.S. Government's source of revenue is its tax payers. So the $7.70 a week I am getting may equate to hundreds to thousands of extra taxes in the future. So perhaps the best thing to do is to invest this extra money now to pay for taxes in the future?

As a final thought, I just turned in a bunch of cans and bottles at the recycling center and got $8.57 and then I bought two pounds of potato salad at the supermarket next door and still had some money left over. I am sure a lot of people are able to turn in enough cans per week to make $7.70 to $13 so perhaps a more green and less debt-laden plan is to encourage people to recycle? What do you think?

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Not too late to get your IRS stimulus rebate--if you qualify

Philip Brewer — Wed, 14 Jan 2009 19:20:04 +0000

A lot of taxpayers missed out on getting their IRS economic stimulus rebate last year, even though they qualified. If you're one of them, you'll be glad to know that there's a way to get your check.

There seem to be two big reasons people didn't get the payment they should have. Some people made a mistake on their tax return, such as an incorrect Social Security number for a dependent--and according to IRS rules, that disqualified them. Other people qualified for the payment last year, but wouldn't have qualified the previous year--but the IRS used your previous year's tax return to decide whether to send a check or not.

Whether it was for one of those two reasons or some other, if you qualified for a tax rebate last year, but didn't get one--or didn't get the full amount--you can fix it when you file your taxes this year.

The details are on these two IRS pages:

The gist of the matter, though, is that you can figure out what the stimulus payment should have been, based on correct information and your actual status for 2008. If you got some stimulus money, but not the full amount, you subtract off the partial amount--but whatever stimulus you qualified for, but didn't get, goes on your return as a credit, and will be added to your refund (or deducted from whatever you owe).

Of course, if you didn't qualify for a stimulus payment, this doesn't help. But if you qualified, but didn't get the full payment you should have gotten, now you can fix it.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Will 4.5% mortgage rates jumpstart the housing market?

Xin Lu — Thu, 04 Dec 2008 19:44:59 +0000

It seems like everyday the folks in Washington are rolling out a new plan to fix our economy. The Federal Reserve is running out of room to cut their federal funds rate, so now the news reports that the Treasury is planning to forcibly cut mortgage interest rates to 4.5% on new mortgages. The details about the plan still remains unclear, but will this boost the sagging housing market? Also, how could this help you as a consumer?

First, it is unclear if the 4.5% interest rate can be applied to refinancing a mortgage. From the sound of the CNN article the 4.5% rate would be available to those who try to refinance, but a new article in the Washington Post states that the dirt cheap mortgage rate would only be available for new loans on home purchases. If this is only available for new home purchases then it would not help anyone with unaffordable mortgage payments.

I think this artificially depressed mortgage rate could help people that have capital to buy a home, but it could also artificially prop prices up so that the benefit a potential homebuyer could receive gets cancelled out by the inflated price. The big winners would potentially be investors in real estate that could rent out their homes for returns more than the interest rate they pay, but once again, these are people who already have money and do not need any help.

According to the Census Bureau, the homeownership rate in America is 67.9%, and that means most people are not exactly jumping to buy a place to live in because they already have a mortgage or two. So if these low rates are not made available to the majority of existing homeowners, then there may be more seething anger in the future. Even if the lower rate were offered to everyone, as the CNN article pointed out, many who do not have enough equity in their homes may not qualify for a refinance.

The CNN article seems to indicate that this move is being driven by lobbyists from the home building industry. There is also another more drastic program called "Fix Housing First" that is being pushed by builders that proposes subsidized loan rates of 2.99% on new home purchases made next year. I do not know about you, but this seems like an attempt by builders to prop up the prices of their unfinished units.

In light of this, I guess my only advice to those of you that have not bought a home yet is to keep as much cash as you can because prices are still falling in most of the country and having a significant downpayment and a good credit history is key to qualifying for a mortgage. For those of you that already have a home with an interest rate higher than 4.5%, perhaps all you can do is complain to your representatives later. If it turns out that you could refinance to more than 1% below your current rate, then you could save quite a bundle over the term of your loan.

Some people will definitely profit from all of this price fixing, but odds are these people are not everyday folks who just want a home of their own to live in.

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

You must file a tax return to get economic stimulus tax rebate

Philip Brewer — Thu, 20 Mar 2008 01:50:34 +0000

Surely by now everyone has heard of the economic stimulus tax rebate. What may not be universally known is that one of the little tweaks the Democrats added were some rules under which even many people who don't pay taxes can get a rebate. To get it, though, you have to file a return.

[Updated 14 January 2009: If you qualified for a rebate last year, but didn't get it--or didn't get the full amount--you can still claim your economic stimulus money when you file your taxes this year.]

If you're paying taxes for 2007, you probably have to file a return anyway, and if you do, you probably qualify for the whole stimulus payment ($600 per person or $1200 per couple).

But, if you're one of the 23 million who doesn't need to file a return--because you're a low-income worker, a senior on social security, a veteran on disability, or otherwise get by on such a small income that you owe no taxes--you might want to file a return this year anyway. You still qualify for a half-size rebate ($300 per person or $600 per couple) if you made at least $3000 in 2007 from any combination of:

earnings from a job or self-employment
social security
railroad retirement
veterans benefits

Various providers of tax software have been participating in the IRS's "Free File" program which offer ways for people with modest incomes ($54,000 a year or less) to file their taxes online for free.

And, just for those people who are only filing to get the economic stimulus rebate, there's a special expansion of this program.

The IRS also has announced the schedule for the rebate payments. To get yours as quickly as possible, file a return by the April 15th deadline, and provide direct-deposit information.

Direct Deposit Payments
If the last two digits of your Social Security number are:	Your economic stimulus payment deposit should be sent to your bank account by:
00 – 20	May 2
21 – 75	May 9
76 – 99	May 16
Paper Check
If the last two digits of your Social Security number are:	Your check should be in the mail by:
00 – 09	May 16
10 – 18	May 23
19 – 25	May 30
26 – 38	June 6
39 – 51	June 13
52 – 63	June 20
64 – 75	June 27
76 – 87	July 4
88 – 99	July 11

For more information on any of these programs, see the IRS FAQ.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: