General Discussion
Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsCan someone explain why interest rates are still so low?
I seem to remember back coming out of the recession every 6 months the fed meeting and deciding not to raise interest rates because they were afraid of hurting the recovery. Well now were well out of recovery territory and the economy is doing well yet interest rates are still at near record lows. Unless youre really shopping around most banks arent paying over 1% on savings if even that, you can still get a 30 year mortgage for in the 4.5-5% range and cds are around 2.5% I saw. Its no wonder the economy is doing well, record low taxes, near record low interest rates and all the stimulus money poured into the economy by the fed under Obama. I just hope when the bubble bursts it isnt too bad.
The Velveteen Ocelot
(115,899 posts)unblock
(52,386 posts)too much inflation (3% per year or more) is a problem as it erodes the value of assets and can set off a vicious circle of higher prices, higher wages, followed by even higher prices, etc.
too little inflation or even deflation (1% inflation or less) is a problem as it can stagnate the economy if people with assets feel no pressure to put them to good use.
modest inflation works best.
higher interest rates can lower inflation, and lower interest rates can increase inflation, so the fed plays around with interest rates primarily to keep inflation in the right range.
ever since the financial crisis, there has been negligible inflation, so rates were nearly zero ever since. only recently have signs of broad inflation started to show up, so they've been raising rates, but very slowly so as not to cause a recession.
if the economy were growing at 4% or 5%, that would put more upward pressure on prices, and the fed would be raising interest rates more quickly. as it is, we're only growing at 2% or 3% so they need to keep the pace of increases slow.
Adrahil
(13,340 posts)Interest rates are raised to restrict borrowing from exacerbating inflation. Inflation is very low due to stagnant wages, so they keep the cheap money spigot open.
quartz007
(1,216 posts)such as housing, groceries, hospital and doctor's bills, lawyer's charges, property taxes, car repairs, etc.
The low inflation calculated by government (CPI) does not include many volatile items and necessities.
Adrahil
(13,340 posts)... the Fed doesn't really exist for you or me. Their primary concern is for the wealthy, and the banking system.
They look at inflation overall. Not how it affects the everyday expenses.
quartz007
(1,216 posts)and bankers like rich people, not ordinary not so rich people.
Besides, every person on Fed board is quite rich. They do not want their personal stock and bond holdings to lose values with higher interest rates. I can't prove what is in their heads, but it would be a natural instinct to protect their own wealth.
brooklynite
(94,792 posts)So there's no pressure on pricing.
quartz007
(1,216 posts)When inflation reached 15% during late 1970's Fed chair Volcker increased interest rates to double digits. Result was the inflation came down.
Since the financial debacle of 2008, economy has been basically in stagnant mode. That may be the main reason Fed has been keeping interest rates near zero (Zero interest rate policy or ZIRP). In 2017 economy grew a bit, so Fed has been increasing interest rates a bit here and a bit there.
Keeping ZIRP has resulted in bubbles in bond markets (which has monetary value bigger than stock market), real-estate and stock market because money earns so little in fixed income accounts such as CD's and savings.
That is why Fed is afraid to increase interest rates quickly to normal levels based on inflation & monetary growth because they are afraid of a sudden bursting of the bubbles.
But bubbles can only be delayed, but impossible to stop from deflating in the long run. Bigger the bubble, bigger the collapse will be.