Growing Concern about Bankruptcies If Fed Reserve Continues to Cut Interest Rates

Economic experts are worried that the Federal Reserve might be powerless to stop the onset of another recession, which could result in more people declaring bankruptcy in the future.

Once interest rates hit zero, say some financial commentators, the Federal Reserve could have a serious “math problem.” That’s because rates can’t realistically go much lower than zero. For instance, if bank deposits were bringing back a negative return on investment, with people actually “paying” for the privilege of keeping their money in the bank, many depositors would soon withdraw their funds and keep it on hand as cash. They would not necessarily be “earning” anything on the cash, but at least they would not be losing a percentage of it.

The math problem that the Fed could face is that it might not be in a position to provide the economy with a much-needed boost in the event of another recession. Typically, the Fed Reserve can cut interest rates in order to jump-start a stagnating economy; however, that won’t really be possible if rates have already been slashed too low and there isn’t much lower to go. Although the Fed could still potentially order that more currency be printed, this doesn’t usually work as well as a standard interest rate cut.

The Federal Reserve estimates that interest rates will settle at around 3.25 percent. This is in line with a recent trend of lowered expectations by the federal agency: in 2012, the expected rate was 4.25 percent; in 2013, the rate was lowered to 4 percent; in 2014, the rate was lowered even further to 3.75 percent; and this was followed by another downgrade to 3.5 percent in 2015.

Rates are expected to be so low now that if and when the Fed Reserve needs to radically cut interest rates by as much as five percent in order to combat an economic collapse, the agency won’t be able to do so. The bottom line is that the economy won’t receive the kind of “monetary stimulus” that it needs, leaving people who are already struggling with debt in a difficult position.

To learn more, check out the Washington Post article, “The Number That Tells Us the Economy Might Be Doomed.”

 

If you are thinking about filing for bankruptcy, whether it’s Chapter 11, Chapter 13 or Chapter 7, you should make sure you talk to a knowledgeable debt relief and bankruptcy lawyer before making any final decisions. Joel R. Spivack is an experienced, knowledgeable bankruptcy attorney who will help you explore your legal options. Contact Mr. Spivack today to schedule a free consultation.

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