Is $600 billion a psychic lift to the economy?
Plans by the Federal Reserve System to pump $600 billion into the economy during the next eight months to encourage lending and keep interest rates low could boost the borrow-and-spend spirits of bank customers.
And next to real economic growth in the form of job creation, business expansion and capital spending, that psychic lift could be the best way to bolster an economic recovery, local banking experts say.
The Federal Reserve plan is called quantitative easing, a term that refers to tinkering by central banks around the globe to stimulate lending and business activity. On the one hand, it can be a good thing by keeping long-term interest rates low and more attractive to borrowers.
The key is to trigger economic activity. A possible secondary benefit is boosting the bottom lines of banks that have struggled with problem loans and a desire by consumers and businesses to get their finances in order, especially by cutting back on credit purchases and loans.
On the other hand, some economists warn that quantitative easing could trigger inflation if that cheap money leads to supercharged economic activity.
Banks will benefit if the policy “gets the economy going and improves the jobs and profitability of companies,” said Jeff Baker, a banking specialist and partner with McGladrey & Pullen LLP in Des Moines.
Those banks could also benefit from what appears to be a gradual improvement in the economy.
“To the extent the economic outlook is brighter and companies are performing better, I think banks will be more comfortable advancing loans,” Baker said.
Tom Gronstal, superintendent of the Iowa Division of Banking, agreed.
In addition, he said, low interest rates will make it less expensive for banks to keep problem loans on their balance sheets until the properties securing them can be sold.
Beyond low interest rates, those properties have to appear lucrative to potential buyers, especially commercial properties.
“First, someone needs to want to buy it, and with commercial property you need to be able to do something with it, generate some income,” Gronstal said. “We’re just in a challenging environment.”
If the Federal Reserve policy keeps interest rates low, that also could result in additional gains in the price of farmland, especially when combined with higher commodity prices, he said.
“The main effect it will have, if it works like they think that it will work, it will continue to keep longer-term interest rates low, so borrowing costs will be lower,” Gronstal said.
John Sorensen, president and CEO of the Iowa Bankers Association, said there are benefits and risks to quantitative easing. As with Baker and Gronstal, he is more impressed by other, more subtle signs that the economy is improving.
“What I’m hearing anecdotally from our lenders is that they are hearing more positive statements from business customers about additional capital spending and hiring and sales,” Sorensen said.
The impact of the current Federal Reserve policy will be slow to filter through the economy, he said, and that could be a good thing.
“By providing additional liquidity, the Federal Reserve could push up inflation at a normal level,” Sorensen said. “The challenge, of course, is whether you can scale it back when you need to. … can you withdraw the liquidity that’s been provided in an orderly fashion?”
Banks, he noted, like to see economic activity progress in an orderly fashion. Uncertainty among businesses and consumers has resulted in a lack of loan demand, and banks like to put money back into their communities.
“I hope low interest rates will create an environment where businesses and consumers feel more comfortable,” Sorensen said.