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Lowering interest rates wasn't to encourage consumer spending. It was to prevent businesses from going bankrupt. If you owned a perfectly sustainable business p

by Aunche 4y ago

Lowering interest rates wasn't to encourage consumer spending. It was to prevent businesses from going bankrupt. If you owned a perfectly sustainable business pre-pandemic that happened to owe debt, you'd be completely screwed when your revenue plunged during the pandemic. The only way to stay operational is to take on more debt, but that may not be possible if interest rates are too high. Lowering interest rates during a pandemic makes sense. What doesn't make sense is lowering interest rates when the economy was perfectly healthy in 2019.

metaphor 4y ago
> What doesn't make sense is lowering interest rates when the economy was perfectly healthy in 2019. Err, "perfectly healthy" may be a bit of a mischaracterization. Quoting from the July 2019 FOMC statement[1] (my emphasis): >> Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. ...then the following September statement[2]: >> Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. ...and still the following October statement[3]: >> Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. Look at the Fed Funds Effective Rate[4] circa 2019, then compare that to the Fed's balance sheet[5] around the same time. I understand that little ~$500 billion bump in the 6 months prior to the start of COVID is the Fed averting crisis in a bond market that was approaching dangerously close to the sort of illiquidity levels which get sovereign nations into a lot of trouble. I also understand that banks were supposed to be part of the machine that provide that liquidity, except regulations coming out of the Great Financial Crisis that imposed things like Liquidity Coverage Ratio and Supplementary Leverage Ratio requirements created an unintended incentive for banks to drop low-yield bonds from their now constrained balance sheets to optimize profits. So the flow of capital towards "business fixed investments" tightened, capital which originates in the form of loans from banks, and interest rates is a knob the Fed can tweak...or something like that. To be sure, I'm neither a banker nor an economist. Also worth noting that the S&P 500 went through a -18% correction starting the end of September 2018 and didn't recover until May 2019. [1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20190731a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... [2] https://www.federalreserve.gov/newsevents/pressreleases/monetary20190918a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... [3] https://www.federalreserve.gov/newsevents/pressreleases/monetary20191030a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... [4] https://fred.stlouisfed.org/series/DFF https://fred.stlouisfed.org/series/DFF [5] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
triceratops 4y ago
Weren't PPP loans meant, in part, to prevent businesses from going bankrupt? Why lower interest rates instead of doing direct cash transfers through unemployment insurance and other assistance? If a business is making $0 due to the pandemic, why would a bank be more likely to lend to them at a 1% interest rate rather than a 4% interest rate?

by Aunche 4y ago

metaphor 4y ago

> What doesn't make sense is lowering interest rates when the economy was perfectly healthy in 2019. Err, "perfectly healthy" may be a bit of a mischaracterization. Quoting from the July 2019 FOMC statement[1] (my emphasis): >> Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. ...then the following September statement[2]: >> Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. ...and still the following October statement[3]: >> Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. Look at the Fed Funds Effective Rate[4] circa 2019, then compare that to the Fed's balance sheet[5] around the same time. I understand that little ~$500 billion bump in the 6 months prior to the start of COVID is the Fed averting crisis in a bond market that was approaching dangerously close to the sort of illiquidity levels which get sovereign nations into a lot of trouble. I also understand that banks were supposed to be part of the machine that provide that liquidity, except regulations coming out of the Great Financial Crisis that imposed things like Liquidity Coverage Ratio and Supplementary Leverage Ratio requirements created an unintended incentive for banks to drop low-yield bonds from their now constrained balance sheets to optimize profits. So the flow of capital towards "business fixed investments" tightened, capital which originates in the form of loans from banks, and interest rates is a knob the Fed can tweak...or something like that. To be sure, I'm neither a banker nor an economist. Also worth noting that the S&P 500 went through a -18% correction starting the end of September 2018 and didn't recover until May 2019. [1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20190731a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... [2] https://www.federalreserve.gov/newsevents/pressreleases/monetary20190918a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... [3] https://www.federalreserve.gov/newsevents/pressreleases/monetary20191030a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... [4] https://fred.stlouisfed.org/series/DFF https://fred.stlouisfed.org/series/DFF [5] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

triceratops 4y ago

Weren't PPP loans meant, in part, to prevent businesses from going bankrupt? Why lower interest rates instead of doing direct cash transfers through unemployment insurance and other assistance? If a business is making $0 due to the pandemic, why would a bank be more likely to lend to them at a 1% interest rate rather than a 4% interest rate?