Costs and benefits of ultra-low interest rates

Date posted: December 26, 2013

Interest rates have been super low for almost five years now. Has the Federal Reserve’s efforts to keep the interest rates it controls been a plus or minus for the economy? N.C. State University economist Mike Walden responds.

“Economists frequently look at (this question) more and more. I think we would agree that during the recession, the worse of the recession, ultra-low interest rates were actually helpful, because they did motivate some borrowing and spending. But as we move past the recession, I think economists are looking at more of some of the minuses, as well as the pluses. For example, ultra-low interest rates have allowed governments to borrow more at lower cost, and obviously a lot of people worry about government borrowing.  Theymotivated investors to move their money away from interest on investments, like CDs and bonds, to the stock market. And there, again, some worry about whether that has inflated the stock market to unsustainable levels.

“It’s also motivated investments away from the U.S to many emerging markets, like India and China. In terms of specific products, clearly low interest rates help the housing market, but on the other hand, there’s evidence that it’s actually hurt some insurance products.

“So, a mixed bag here, and I think the Federal Reserve — now soon to be under the new chairperson Janet Yellen —  will need to look at this combination of pluses and minuses of low interest rates.”

 

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