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Financial Ignoramus here - looking back - were ultra low rates a mistake? It seems insane that this number has grown so much since even last year. Would slowly

Financial Ignoramus here - looking back - were ultra low rates a mistake? It seems insane that this number has grown so much since even last year. Would slowly growing them over a longer period have been better than these huge jumps? It seems wrong that I refinanced a 500k mortgage last year and I would be paying ~35% less per month than someone who did the same thing today.

sdenton4 4y ago
The trick here is that high interest rates may be the smallest possible evil: we had a two year pandemic and all kinds of stacked global economic catastrophes (with the War of Russian Aggression still ongoing), from which you would expect major economic problems to arise. The measures taken to stage off the worst possible effects are now manifesting high interest rates. The cure can hurt, too. There's definitely a big element of missed opportunity, though. Non-billionaires got a giant infusion of cash through higher wages and such, for the first time in decades... So, too much money chasing too few goods in the short term, giving inflation. But in the longer run, it would be far better to rework the economy to actually meet the demands of non billionaires (housing, education, medical care, oh my) than to complain about how the proles have money all the sudden and plot new ways to take it away from them.
kypro 4y ago
I'm getting increasingly agitated by this claim that rates were irresponsibly low over the prior decade. It's honestly shocking to me that so many people who should know better are even making this claim because I feel it's misleading people like yourself to believe there is some responsible level for interest rates. The truth is were rates not "low" the US would have probably have entered a period of either extremely slow growth, recession or out-right deflation over the last decade. Reason being there is such a thing as the neutral rate of interest which is basically the interest rate require to keep inflation at a constant pace if you go above or below that inflation is likely to start increasing or decreasing. What central bankers are basically trying to do is keep core inflation somewhere around 2-3% so the value of money is stable, but it also doesn't pay to horde cash. Then when you get to that 2% target you want to try to keep rates around the neutral rate of interest to remain at that 2% inflation target. This idea that I suspect you're heard that interest rates were "ultra low" assumes that there is some normal rate of interest which there isn't - the average rate is different for different economies. The appropriate interest rate simply depends on the economic conditions - specifically growth trends. As real economic growth slows interest rates will naturally need to fall which is why they have been trending down in the US and other developed economies for decades now. Now where I think people are specifically going wrong here is that there is no dangerous or irresponsible level for interest rates. What's dangerous about interest rates isn't the level, but the change. For example were interest rates closer to 5% over the last decade then they suddenly shot up to 20% in 2022, that isn't any better than what we see today. Because what matters here isn't the specific rate of interest, but how affordable debt is and that affordability can only be assessed in a relative manner. So where mistakes are made imo is in excessively sharp cuts to interest rates followed by excessive hikes. I'd argue that yes, what's been happening since Covid has been so extremely irresponsible it's almost beyond belief. But if you're going to claim interest rates were "low" you need to explain what you mean. Do you mean relative to the neutral rate or relative to what they were during a pervious period in time when economic conditions were completely different? The former is a valid conversation to have, the latter simply asserts that the historic average, or the rate at some specific point in time is the correct rate for today which is an argument that holds little merit.
- caeril 4y ago
  > a period of either extremely slow growth Oh no, slightly less out of control consumerism! Slightly less carbon emission! Horrors! > or out-right deflation You mean the lower classes would have to pay less for their basic necessities? They might be able to afford housing? God that sounds like a nightmare.
gizmo686 4y ago
Its complicated. Overall, I think it is safe to say that rates were too low. Look at this graph[0] of rates over time. When the 2008 recession happened, rates dropped to stimulate the economy. While you can find dissent on this point, overall, this is generally considered a prudent move and the conventional responce to a recession. What happened next was that interest rates stayed near 0 until 2015, which was far too long. In 2015 the Fed started raising rates, but did so slowly. The problem came in 2020, when the Covid recession hit. Following conventional wisdom, the Fed responded by dropping rates. However, rates were not yet high enough for this to be fully effective, and you can't go (much) below 0%. As a result, the Fed resorted to more creative measures of stimulating the economy; and economists will likely be arguing about the effect of that for years. Having said that. This isn't particularly relevent to what is going on today. To fight inflation, the important factor is the increase of interest rates. Even if we started with high rates, they would still need to increase them to get the desired deflationary effect. Simmilarly, the stimulating effect is more about dropping rates then having low rates. [0] https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS

sdenton4 4y ago

The trick here is that high interest rates may be the smallest possible evil: we had a two year pandemic and all kinds of stacked global economic catastrophes (with the War of Russian Aggression still ongoing), from which you would expect major economic problems to arise. The measures taken to stage off the worst possible effects are now manifesting high interest rates. The cure can hurt, too. There's definitely a big element of missed opportunity, though. Non-billionaires got a giant infusion of cash through higher wages and such, for the first time in decades... So, too much money chasing too few goods in the short term, giving inflation. But in the longer run, it would be far better to rework the economy to actually meet the demands of non billionaires (housing, education, medical care, oh my) than to complain about how the proles have money all the sudden and plot new ways to take it away from them.

kypro 4y ago

I'm getting increasingly agitated by this claim that rates were irresponsibly low over the prior decade. It's honestly shocking to me that so many people who should know better are even making this claim because I feel it's misleading people like yourself to believe there is some responsible level for interest rates. The truth is were rates not "low" the US would have probably have entered a period of either extremely slow growth, recession or out-right deflation over the last decade. Reason being there is such a thing as the neutral rate of interest which is basically the interest rate require to keep inflation at a constant pace if you go above or below that inflation is likely to start increasing or decreasing. What central bankers are basically trying to do is keep core inflation somewhere around 2-3% so the value of money is stable, but it also doesn't pay to horde cash. Then when you get to that 2% target you want to try to keep rates around the neutral rate of interest to remain at that 2% inflation target. This idea that I suspect you're heard that interest rates were "ultra low" assumes that there is some normal rate of interest which there isn't - the average rate is different for different economies. The appropriate interest rate simply depends on the economic conditions - specifically growth trends. As real economic growth slows interest rates will naturally need to fall which is why they have been trending down in the US and other developed economies for decades now. Now where I think people are specifically going wrong here is that there is no dangerous or irresponsible level for interest rates. What's dangerous about interest rates isn't the level, but the change. For example were interest rates closer to 5% over the last decade then they suddenly shot up to 20% in 2022, that isn't any better than what we see today. Because what matters here isn't the specific rate of interest, but how affordable debt is and that affordability can only be assessed in a relative manner. So where mistakes are made imo is in excessively sharp cuts to interest rates followed by excessive hikes. I'd argue that yes, what's been happening since Covid has been so extremely irresponsible it's almost beyond belief. But if you're going to claim interest rates were "low" you need to explain what you mean. Do you mean relative to the neutral rate or relative to what they were during a pervious period in time when economic conditions were completely different? The former is a valid conversation to have, the latter simply asserts that the historic average, or the rate at some specific point in time is the correct rate for today which is an argument that holds little merit.

caeril 4y ago
> a period of either extremely slow growth Oh no, slightly less out of control consumerism! Slightly less carbon emission! Horrors! > or out-right deflation You mean the lower classes would have to pay less for their basic necessities? They might be able to afford housing? God that sounds like a nightmare.

gizmo686 4y ago

Its complicated. Overall, I think it is safe to say that rates were too low. Look at this graph[0] of rates over time. When the 2008 recession happened, rates dropped to stimulate the economy. While you can find dissent on this point, overall, this is generally considered a prudent move and the conventional responce to a recession. What happened next was that interest rates stayed near 0 until 2015, which was far too long. In 2015 the Fed started raising rates, but did so slowly. The problem came in 2020, when the Covid recession hit. Following conventional wisdom, the Fed responded by dropping rates. However, rates were not yet high enough for this to be fully effective, and you can't go (much) below 0%. As a result, the Fed resorted to more creative measures of stimulating the economy; and economists will likely be arguing about the effect of that for years. Having said that. This isn't particularly relevent to what is going on today. To fight inflation, the important factor is the increase of interest rates. Even if we started with high rates, they would still need to increase them to get the desired deflationary effect. Simmilarly, the stimulating effect is more about dropping rates then having low rates. [0] https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS