Bernanke told Congress on Thursday that we still need extremely low interest rates to help our recovery economy. He pointed out that with the low inflation rates the Fed can easily keep the interest rate near zero.
He did not say anything specifically about when the Fed would begin to raise interest rates - only saying it would be "when expansion matures". This will be the most important decision the Bernanke will have to make as it will determine the entire economy's well being. If the interest rate is raised too soon, the recovery will not be complete. However, if the interest rate is kept low longer than needed for the recovery, inflation will rise and 'bubbles' could happen.
This article also says that the Fed is keeping the interest rate low for unemployment reasons as well. It quotes that our unemployment rate is 9.7%. This is the worst economic crisis since the 1930s.
The purpose of having low interest rates is to encourage spending and bank lending however neither is happening because of low consumer confidence. I feel like this phenomena is similar to the chicken and egg problem and the question is which market is willing to make the first move? Banks are comfortable holding onto excess reserves because of the low rate of return gained from lending out money while the lack of a credit market has dissuaded consumers from spending money. Keeping such low interest rates can not last forever and I am curious to see which side budges first.
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