Greenspan and his colleagues at the Federal Reserve have vowed to keep short-term interest rates low for a "considerable period of time". As the economy shows positive signs of recovery, the Fed held the federal funds rate, which is the rate that commercial banks charge each other for overnight loans, was held to an all time low of 1%. This step by the Fed is intended to keep credit easy, and add fuel to the economic recovery. By targeting this key short-term interest rate, the Fed can influence other short-term rates that affect consumer and business borrowing. Low short-term interest rates are a welcome condition at a time when the economy needs spending to pull it out of the doldrums.

The other side of the picture, however, is longer-term rates, over which the Fed has much less influence. Financial markets determine long-term interest rates through the forces of supply and demand. One long-term rate, the mortgage rate, is important to new commercial development and to the new housing market. As one banker put it, "The low interest rates will continue to allow someone to buy a home, and we are seeing a lot of appreciation in home values. If rates increase too high, people wouldn't be able to afford to buy first-time homes or buy better homes after selling their current ones." Long-term interest rates also influence large commercial development projects. As long-term rates increase, projects that may have been profitable before the increase are not undertaken at the new higher rate of interest. The economy as a whole loses as potential growth and potential jobs are lost.

Even though the impact is indirect, the Fed's intention to keep short-term rates low "for a considerable time" is expected to help stabilize long-term rates such as the mortgage rate. If this prediction comes true, the economy should continue to see a growing housing market, as well as new commercial development and industrial expansion.

(Updated October 1, 2003)