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I recently spotted this comment posted by Wreed (alias) on USA Today’s article: Buffett: Economy in a recession, will be worse than feared. Though I’m sure this person had the best intentions in mind, I felt compelled to respond to why the Federal Reserve might not respond the way he wishes them to.

“If the fed.. would have a little sympathy for the ppl.. that have a savings account in banks…Maybe,,just maybe,,the banks would pay the people who’s money they are using,,,to help strengthen their profits ,, a more fair interest on the money they have on deposit,,,,really after all the fed,. is bailing out all the greedy & big investers,,that caused all the trouble,,,,why not spread the good will around,,,Mr,, Bernanke??? It’s Quite obvious they don’t want ppl.. to save money,,just spend it as fast as you can get your hands on it..”

Problems with this statement:

• Paying depositors higher interest rates would require businesses, big and small, to pay more money on their loans in order to fund the expansion of their business activities and therefore limiting the possibilities for economic growth. This will have an especially significant impact on small businesses as they have less venues to access capital. They also account for the greater majority of business activity here in the US which would amplify the problem even further.
• It’s also best to keep in mind that interest rates and opportunity costs go hand in hand: the greater the opportunity cost that businesses experience by not being able to attain capital, the greater they’ll be willing to pay for it. So without a strong economy to back up high interest rates, it essentially translates to giving people money for doing nothing, which is the definition of inflation.
• At the Federal Reserve level, interest rate adjustments should only be seen as a way of regulating the economy’s engine from going too fast or going too slow and not as a source for economic growth in itself. It should be in their best interest to have a steady and optimally growing economy (no pun intended). Referencing the previous point, business activity should be the main driving force behind the establishment of interest rates and the Fed nearly there to prevent potential economic disasters such as a depression.

Basically, what I am trying to say is that it is not and it should not be the responsibility of the Federal Reserve to set interest rates for the benefit of certain businesses segments or for consumers. It should simply look out for the general well-being of the economy as a whole and make the necessary, albeit difficult, judgments when needed.