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interest rates

The article Myths About the Fed says it's just a myth that the Fed sets interest rates. It says it only sets the overnight interbank loan rate.

But we KNOW that the reason interest rates have been low since 2008 is because the Fed is intentionally keeping them low, through both the overnight rate and QE. We know they have done this because, supposedly, low interest rates can stimulate the economy.

We also know that Trump has been trying to persuade Powell to make interest rates negative.

So how can it be just a myth that the Fed sets (or influences) interest rates? Why would Trump ask Powell to make interest rates low if Powell didn't have that ability?

 

 

 

 

Interest rates are low because inflation is low, not because the Fed set the overnight rate low. In fact, if the overnight rate was an effective policy then inflation (and rates) would be higher than they are.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Interest rates are low because of Fed policies. It raises interest rates in response to inflation, and it lowers interest rates to stimulate lending.

If the Fed's policies were not a major factor in interest rates, why did Trump ask Powell to make interest rates negative? Why does EVERYONE talk about the Fed raising or lowering interest rates, if it actually does not have that ability?

If left alone, interest rates would reflect the price of borrowing money, which is the result of supply and demand.

The Fed certainly influences interest rates, as you noted, but it does not control them directly.  As to Trump asking the Fed to make interest rates negative - do you think the Fed should comply?  If so, why?  As to the cost of borrowing money, I suggest you look at rates being charged to riskier buyers.  There's also the alternative lending market, which has grown quite large since the financial crisis.  Commercial real estate is a good example.  Banks do term loans on commercial real estate - not like 30 year mortgages on homes.  After the financial crisis, as term loans were maturing, the banks were happy to offer new terms to good credit worthy borrowers, but often only at 50% LTV, rather than 75% (or higher) as was common before the great recession.  Landlords owning fully leased buildings were forced to take what the banks offered for the 50% and go to alternative lenders for the rest - paying much higher rates to those alternative lenders.  The Fed has no control over that part of the credit markets.  As to "EVERYONE" talking about the Fed doing this or that - I would remind you that most people have no good grasp on how our monetary system even works - and that includes plenty of famous pundits, economics professors, and certainly many (if not most) politicians.  More evidence that the Fed has far less control over interest rates than many people believe is their failure to consistently reach their target inflation rate.  Other central banks have also failed at moving inflation to their stated targets.  QE (as you pointed out) may have stimulated the economy (to a certain extent) - but inflation hasn't budged.  Odd, don't you think?  Isn't inflation supposed to increase in a robustly growing economy?

I think negative interest rates is a very bad idea. Trump wants it because he thinks it would help the economy, and because other countries are doing it. Trump is not an economist, so whatever he thinks should be ignored. And hopefully Powell will continue to ignore that request.

Ok, so the Fed does not completely control all interest rates. But they do have a lot of control. They have set their funds rate to zero, and that is why banks are charging lower interest on loans and paying less on savings.

I said EVERYONE says the Fed controls interest rates, but of course I am well aware that everyone can say something and it can still be wrong. But if everyone says it -- including respected experienced economists -- then it has a good chance of being true. By "everyone" I did not mean to include the average person who knows and cares nothing about economics. I do agree with you though that pundits and politicians don't have much understanding. And even the greatest experts often disagree with each other -- proving that the economy is not so simple.

Then you said the Fed's control over interest rates is limited because inflation is still too low. No, that does not follow. Why assume that lower interest rates will necessarily raise inflation? There are multiple factors that influence inflation. And no, we did NOT have a "robustly growing economy" before the pandemic. We had an inflated disconnected stock market, that Trump thought signified a healthy economy. We had misleading unemployment data.

Also, the inflation data is misleading. Everyone knows prices have been going up. Except the professionals who keep track of inflation don't seem to notice.

I don't think low interest rates or QE are any good for the economy, in the long run. They just postpone the disaster. The 2008 interventions led up to what we are seeing now. Even months before the pandemic things were becoming very shaky. And now we are being set up for an even bigger mess.