During Covid, interest rates were 2% and it helped the economy, explain why lowering rates wouldn’t also be good for the economy.
During Covid, interest rates were 2% and it helped the economy, explain why lowering rates wouldn’t also be good for the economy.
Comments
Because lower interest rates cause inflation. This is from the easier access to money, causing the supply of money to increase, and prices to increase to match. Right now the inflation is caused by the tariffs not a lack of access to money. That means inflation would accelerate due to tariffs and the easy access to money.
Inflation, particularly in the housing market.
Low interest rates add cheap borrowed cash to the economy spurring spending and economic activity.
High interest rates do the opposite.
You lower interest rates when you want to speed up the economy. The cost however is inflation.
So if inflation is already rising, you really don’t want to drop the interest rate because it’ll make inflation worse.
In general, controlling the economy is a bad thing, because there are too many variables for anyone to have the correct data in real time to make good decisions.
So the economy is largely left to its own devices. We make it so that people can fairly trade, and then we let that trade run its course.
Things like “interest rates” aren’t set to be “good” for the economy.
They are set because that’s what they are. There are a number of complex variables that go into deciding the interest rate. To try to intentionally set a rate for economic outcomes is a risky proposition, because of how complicated it is. But to determine it based on a certain set of indicators is much, much safer, and easier.
Now when we set controls on the economy during COVID, that wasn’t for no reason. In general controlling the economy is bad, but sometimes the risks of controlling the economy are worth staving off some other more severe, more concrete harm. So basically, in times of emergency, we can set economic controls to try to affect consumer behavior. If the pandemic was going to cause the economy to stagnate, intentionally lowering the interest rate encouraged consumers to spend money, which fought that stagnation.
However, these types of economic controls are latter resorts, not first ones.
Also think about why something happens in that context. If we suddenly drop to 2%, something has broken. We have accepted inflation and the dollar is going to be worthless as we print more of it.
Jerome Powell has refused to drop it to fight inflation. If it dropped to 2%, he’s either accepted it’s over or the president now has control over the Federal Bank to control interest rates which isn’t good (see Argentina and Turkiye).
Do you mean raised to 2%?