Tuesday, February 10, 2015

If the Economy is Strong, why is the Fed keeping Rates Low?

This is an excellent question, as Ryan McMaken addresses here with this article.

Many argue that the economy is not rebounding, or it is not rebounding as strongly as advertised.


Anonymous said...

Why would anyone want high interest rates?

Robert Williams said...

Interest rates are a function of a time preference of goods/services of the individual. Let us consider two extremes: If Interest rates are zero, this states that individuals prefer purchasing items in the present, as compared to the future. If interest rates are astronomically high, this means that individuals prefer purchasing all their items in the future, and they do not purchase any in the present. Both of these extremes are not realistic.
So, to your question: Someone would prefer "higher" interest rates IF they seek to purchase an item in the future, or save up for an item for the future. Remember: The Natural Rate of interest is simply a notion of time preference. Most people make the mistake that the notion of interest rates is exclusive to the loan market.