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> The more the Fed distorts normal market signals, like interest rates, the less efficiently capital is allocated It seems like a 0% fed rate would corresond t
by usefulcat 4y ago
> The more the Fed distorts normal market signals, like interest rates, the less efficiently capital is allocated
It seems like a 0% fed rate would corresond to a complete lack of 'distortion'--the effective rate is then 100% a 'market signal', no?
I would think--at least according to this author's thesis--that a moderate level of fed 'distortion', in the form of a moderate-but-certainly-not-zero fed rate, would be desirable.
- pclmulqdq 4y agoA 0% rate distorts the market by giving out money for free in the form of loans. A 100% rate distorts the market by giving out money for free in the form of savings interest. Ideally, the fed funds rate is about equal to the inflation rate. Alternatively, there would be a "no distortion" policy if the rate for savings interest was 0% and the rate for loans was >100%.
- imtringued 4y agoA 0% interest rate on debt is actually the ideal interest rate because it implies people save exactly as much as they invest. The reason why a 0% interest rate on cash distorts the market is that it is inherently a government subsidy when the economy is declining temporarily.
- heartbreak 4y agoDo you know what the Fed rate is for?