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It seems interest rates lower during recessions. Right now we are already low and are raising which seems to be a different pattern. Is lowering interest rates

• miketery 5y ago
  Lowering interest rate to stimulate economy, increasing interest rate to lower inflation. Problem is we've got no room left to lower and asset prices have never been higher.
• hedora 5y ago
  Welcome to stagflation.
  • mym1990 5y ago
    We are not yet in stagflation, unless I really missed something. The economy is actually fairly strong by most indicators. The question is whether inflation can be tamed by the time we hit a recession(which we will, whether it is in 6 months, 2 years, 5 years, etc...)
    • throwaway0a5e 5y ago
      Everyone is sure acting like it'll be 6-12mo and if everyone expects a recession in 6-12mo then...
      • babypuncher 5y ago
        These 6-12 month predictions for the next recession are always real popular 6-12 months before the next major election. I recall almost identical rhetoric in H1 2018, coincidentally the last time the fed raised interest rates. Nobody has a clue when the next recession will be.
• downrightmike 5y ago
  Yes, because it increases the money supply. We are supposed to tighten when things are good by raising rates. At this point they need to raise rates to pull money out of the system. Because with covid, not only did we cut rates, we put in a HUGE amount of money and that was really irresponsible. And now we are seeing the repercussions with inflation lowering the value of the dollar.
  • mym1990 5y ago
    I am not sure if it is really useful to evaluate what happened vs the other outcomes that we were not able to experience. We don't really even have that many precedents for the situation. It was, and still is, an extremely complex problem to address. Injecting large amounts into the system ultimately doesn't create long term wealth, but in that short term gap during the first 1 of the pandemic many people were undoubtedly pulled out of a hole.
  • InitialLastName 5y ago
    We should recall that not only did the US cut rates and spend a lot of money through the covid recession, when things were bad, it ignored that first bit of advice before Covid when things were good (it's hard to remember now how hot the economy was in 2016-2019, but it was really hot), by cutting taxes and continuing to print money and keep the rates low to cover it. As the tax cut detractors correctly predicted, those tax cuts (and the growth that didn't happen enough to cover them) reduced the US's leverage to respond when an actual crisis came up.
    • throwaway0a5e 5y ago
      I don't see how tax policy matters in this case. That money still sloshes around. The only difference is who's nominally in control of it.
      • InitialLastName 5y ago
        a) higher taxes enable the government to apply deflationary pressure on the economy (by removing currency from circulation) b) Reducing taxes without cutting spending (because it will "pay for itself in growth") leads to a larger deficit, which requires increased debt to cover, which triggers the money-printers.
• userabchn 5y ago
  It encourages investment (over saving), so can help to boost the economy
• nickff 5y ago
  Yes, the common theory is that lowering interest rates encourages investment and growth, at the cost of higher inflation. This increased inflation is also generally thought to depress 'real' salaries, which further increases growth. https://www.investopedia.com/ask/answers/12/inflation-interest-rate-relationship.asp https://www.investopedia.com/ask/answers/12/inflation-intere...
• hitpointdrew 5y ago
  The thinking is that lowering rates will increases spending (why save if you aren't getting much of return, you will find other ways to invest your money rather than have it sit in a bank account). So, if the economy seems to be in a recession central banks will often lower rates to encourage spending. But if you are already at near 0% for a record length of time, and have printed massive amounts of money, well friend we are in uncharted territory. What's better than do nothing? Doing something, we have this interstate rate lever, we can't pull it down, lets push it up!
  • alexb_ 5y ago
    It's being pushed up because we are not in a recession. We aren't even close to being in a recession. We need it to be raised in times like this so we actually have room to move it should things go south.
• mym1990 5y ago
  Yes, lowering interest rates during tough times has the effect of making borrowing capital cheaper, thus incentivizing people to take on risk via opening a business, investing, etc... In contrast, raising interest rates is a way to fight a hot economic market. While in theory having massive growth might be ideal, it would be the equivalent of a sprinter using all of his/her energy in the first 100m while running a marathon...it needs to be a balancing act. Lowering interest rates has been one of the major tools in fighting recessions, and one of the main concerns has been that lowering interest rates isn't possible(or effective) when they are already at such a low level.
• deleted 5y ago
  [deleted]
• brandmeyer 5y ago
  The last couple of recessions have placed a ton of deflationary pressure on the USD, and the fed has reacted to maintain a small positive inflation by both lowering interest rates and QE. Now that inflation is rising and the economy is also at nearly full employment, its pretty straightforward for them to raise interest rates to rein in inflation.
• adamhp 5y ago
  Lowering interest rates makes capital cheaper, which does spur investment and thus economic development, so, it can certainly have that effect given the right circumstances. But keep it too low, too long, and you see money start flying around too quickly, getting a little too loose because everyone wants to get theirs, and then they start inventing things like mortgage-backed securities and everyone starts over-leveraging, because, why not, money is cheap! Then you get 2008.
  • twh270 5y ago
    "Money is cheap" yes, also "you can buy a house if you can fog a mirror". (Buy as in acquire a piece of paper that says you'll pay $$$$ per month to whoever holds the note.)
    • adamhp 5y ago
      Yes, fortunately we've learned from that mistake and I don't think are repeating that this time around. People really are qualified to buy these days, and there just isn't enough supply of housing to go around.
  • mywittyname 5y ago
    It's important to separate out fraud from low interest rates. Low rates absolutely drive investment, and riskier investment at that. But the issue with 2008 was fraud in the lending market, not necessarily the low rates. Risky investments aren't necessarily bad investments. Low interest rates give businesses more runway to operate investments that might take a while to show returns. A million dollar loan at 10% for an investment means that it needs to return into ~$80k a month to break even. At 2%, that same investment only needs a ~$16k monthly return. That's a huge difference in runway needed to start generating cash flow.
    • diognesofsinope 5y ago
      For the record, the evidence of 'widespread' fraud is extremely weak: See Antoinette Schoar's (MIT) work: https://www.nber.org/papers/w20848 https://www.nber.org/papers/w20848 It makes for a good news story that regular Americans understand and frankly want to hear (the banks were bad). But if you really dig into the reports, e.g. Financial Crisis Inquiry Report, almost the only fraud comes from misreporting of income which is essentially consumers lying. There could be other documentation issues, but underwriting almost entirely depends on credit score + income, so they're fairly trivial.
• BurningFrog 5y ago
  It used to be, until they reached 0%. The usual metaphor is that the interest rate is how hard you pull a rope. Pulling harder slows down the economy more. But below 0%, you're trying to push the rope. And, as any rope expert will tell, you that doesn't do anything.
  • wolpoli 5y ago
    It's important to note that the Federal reserve normally controls the overnight rate, and let the market determines the interest rate for other durations (eg. 30Y). That changed with the introduction of Quantitative Easing where it reduces the interest rate over the entire yield curve. In other words, even through the overnight rate is 0%, you could still push down the interest rate down for bonds of a longer maturity, and that'll further stimulate the economy.
• phkahler 5y ago
  >> Is lowering interest rates a method to overcome a recession? It is claimed to be. The idea is that with lower interest rate, companies and people will be more likely to borrow money to spend and that will boost the economy. I for one do not really believe this to be true. I suspect it's the act of lowering rates that gives a temporary boost until things rebalance. In other words, economic activity has some dependence on the derivative of interest rates. This is why things were so good from 198x through 2003 or so, rates were dropping the entire time (filtered of course).
  • jjoonathan 5y ago
    > economic activity has some dependence on the derivative of interest rates If interest rates go down, it's easy to roll over old promises and make new ones besides. If interest rates go up, promises must be kept or the business will fold. At the end of every business cycle, interest rates are low and there are lots of unprofitable "zombie companies" that operate by simply rolling over their promises. In order for the economy to grow, interest rates must be hiked to do a controlled burn and remove this underbrush. Zombie companies have to actually die. This is painful at the best of times. Political will formation will be doubly hard this time around because A. there is more national debt (so we probably need to soft-default on it and inflate it down, first) and B. last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around.
    • reflexco 5y ago
      It seems that Putin is the scapegoat for inflation and will be the scapegoat for recession as well.
      • jjoonathan 5y ago
        This isn't a rate-hike recession, it's stimulus withdrawal. Rates are at 0.25%. Last time it took 20.00% to stop inflation. We haven't even started. We haven't soft-defaulted on the national debt, so we can't even think about starting. The Ukraine conflict will be dusty history by the time actual rate hikes and an actual rate hike recession come around.
• spaetzleesser 5y ago
  "It seems interest rates lower during recessions. Right now we are already low and are raising which seems to be a different pattern. Is lowering interest rates a method to overcome a recession?" It used to be that you could lower interest rates and run up deficits during bad times with the intent of going back to normal when things are better. We now have kept low interest rates and record deficits during good times. When things blow up (as they always do after a while) there is almost nothing left that can be done to counter a recession. In the past going to war helped....
• hammock 5y ago
  The more important causation is the raising of rates. The Fed raises rates which leads to a recession. Then they lower the rates in response.