Pluses and minuses of low interest rates

Date posted: November 22, 2010

Interest rates are at a generation low today, and some think they will even go lower. What kind of impacts do those low rates have? N.C. State University economist Mike Walden answers.

“Like most things in economics, there are plusses and minuses. Now the interest rate you can really view as a price. So just like when the price of something goes down it may help some people and harm other people, and this is the case with these low interest rates. On the benefit side, low interest rates tend to mean that people will borrow more and that will stimulate lending and spending in the economy. It will also help banks performances because they will be making more loans. Thirdly it can boost the price of assets like homes. If the demand for these big ticket items goes up, then we should expect their price to at least go up a little bit. And we need all of those things.

“But on the cost side, certainly if you are a person that saves money and particularly if you are looking for safe places like CDs or money market funds, these low interest rates are just killing you because you are not making a lot of money. So therefore it may encourage some people who normally would like safe investment to venture out into riskier investments — some of which they may not be familiar with, so that may cause problems down the road.

“And then lastly all of this investment and additional spending that perhaps the low interest rates will stimulate could cause what economists call investment bubbles. Just like we had an investment bubble in the housing market a decade ago, some are worried about investment bubbles in certain kinds of investments like commodities. And if that happens, that bubble could pop some years down the road and cause big problems for the economy.”

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