The crisis that causes the crisis

Today  divisions grow between banking authorities in regard to the relevance of maintaining low interest rates at historic lows.

Masiel Fernandez Bolaños

The Chairman of the U.S. Federal Reserve (Fed) Ben Bernanke, has repeatedly defended the monetary policy of low interest rates and insisted that the recovery will be even more moderate to significantly reduce the unemployment rate of 8.3%.

“We believe that inflation will be lower than the target of two per cent over the next two years and we will not allow high inflation to boost employment,” Bernanke said.

The continuing economic crisis of the housing market and the pessimism of consumers are highlighted among the factors that maintain economic growth prospects at a low level, as its spending accounts for 70% of Gross Domestic Product of the U.S.

Fed announced in January that the reference rates will be at lows of between zero and 0.25% by the end of 2014, longer than expected.

The provision generally seeks to stimulate lending and consequently, the money supply and investment.

However, the Fed Chairman of the U.S. city of Philadelphia, Charles Plosser, intensified criticism of the ultra-expansive monetary policy of the highest authorities and warned that any new measure could trigger an increase in prices.

Plosser believes that some of his colleagues have had an accelerated approach to monetary policy, noting that the recent improvement in the economy requires Fed to refrain from further action.

“This acceleration puts the economy dangerously en route to a rise in inflation or a sharp distortion in financial markets,” he pointed out.

Also a Director of the Fed of the State of Missouri, James Bullard, warned that low interest rates for an excessive period would harm the U.S. economy in the long run.

High unemployment and lower growth prospects would be the major implications, he stated.

In this context, Bernanke´s declarations make difficult the view of leaving the door open to a new round of quantitative easing if unemployment remains high and inflation slows down.

After the arsenal used to tackle the economic crisis which began in 2008, Fed has little room for manoeuvre, according to analysts.

The slow recovery of U.S. economy affects the banking sector because existing conditions make it difficult for banks to generate money to give loans, experts say.

It is worth remembering that the unemployment rate in the U.S., above 8%, remained on 10 points for several months.

Furthermore, millions of people lost their jobs working from the onset of the recession, many of which were added to the long lines of the hungry.

Rising prices and distrust

Contrary to expectations, more than three years since the outbreak of the crisis, the situation remains complex in the so-called first world power, which increases the pessimism of Americans.

According to a study from the University of Michigan, consumer confidence fell in February due to pessimism about the economic situation.

It fell to 72.5 points from 75 points in January, mainly because of rising gas prices, which disappointed analysts, who predicted a more moderate decline.

The problems in the labour market also heighten the uncertainty, mainly by high unemployment and millions of jobs lost at that time.

In addition, the consumer prices recorded in January were its biggest gain in four months, also due to higher amounts of gasoline, reported the Labour Department.

A rise of 0.2% increased the concern that the energy values would have an impact on the economy.

In the year-on-year comparison, the increase was 2.9% in the first month of the year and gasoline prices climbed by 0.9 points by tensions in front of possible difficulties in the supply.

Analysts explained that the reading of the consumer price index, seen as a barometer of inflationary trends could add pressure on the matter and stop Fed in the possibility of further monetary stimulus.

Another element to consider is the impact of the European debt crisis, since it is predicted that there will be a recession this year, with consequent damage to the rest of the world.

The situation is also worrying at international level, as specialist Osvaldo Martinez, Director of the Research Centre of the World Economy, Cuba, said that all the anti-crisis arsenal have already been exhausted  (lowering interest rates, tax , massive injections of liquidity and bailouts).

(Translated by Anna Cunningham)