3.) If you were to turn on CNN, Bloomberg, or any other major news network, you might hear them talking about the state of the economy and mention several economic indicators: GDP, inflation rate, Labor Force Participation Rate, etc. These are all important indicators on how the economy is doing, but I believe the two most important indicators are the ones that the public doesn’t hear too much about. Interest rates and LIBOR. Interest Rates can range from rates on U.S. Treasury Bills, Federal Funds Rate, the Discount Rate, etc. LIBOR is definitely something the public doesn’t know too much about. LIBOR stands for London Interbank Offered Rate. It is the benchmark rate the world’s leading banks charge each other for short-term loans (Investopedia).
…show more content…
LIBOR affects interest rates at all levels, and interest rates, alone, affect so much of the economy. Low interest rates can lead to economic stimulus, but also might cause a bubble, if debtors default on loans. This is obvious concern to public policy makers because we don’t want to repeat the recession of 2008-2009. In addition, we don’t rising LIBOR rates either. Rising LIBOR rates reflect a decline in the availability of funds and stresses in the overall financial system (Constable). In other words, there is a decrease in the liquidity in the economy. If the decrease in liquidity is sharp enough, it might cause a credit crunch, which could be a harbinger of another recession. For example, when mortgage costs jump, people have less money to spend on other things and at worst can leave people unable to pay their mortgages (Constable). Policy makers should be watching LIBOR carefully, especially during periods of slow economic growth because if LIBOR was to rise, it might slow down the economy, and policy makers might need to implement stimulatory actions to counteract that. On the other hand, this could be a fine line because policy makers do not want to create a liquidity trap, where their stimulatory efforts fail to decrease interest
LIBOR affects interest rates at all levels, and interest rates, alone, affect so much of the economy. Low interest rates can lead to economic stimulus, but also might cause a bubble, if debtors default on loans. This is obvious concern to public policy makers because we don’t want to repeat the recession of 2008-2009. In addition, we don’t rising LIBOR rates either. Rising LIBOR rates reflect a decline in the availability of funds and stresses in the overall financial system (Constable). In other words, there is a decrease in the liquidity in the economy. If the decrease in liquidity is sharp enough, it might cause a credit crunch, which could be a harbinger of another recession. For example, when mortgage costs jump, people have less money to spend on other things and at worst can leave people unable to pay their mortgages (Constable). Policy makers should be watching LIBOR carefully, especially during periods of slow economic growth because if LIBOR was to rise, it might slow down the economy, and policy makers might need to implement stimulatory actions to counteract that. On the other hand, this could be a fine line because policy makers do not want to create a liquidity trap, where their stimulatory efforts fail to decrease interest