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Central banks don't say a lot about what they are / are not trying to do. Ask the reverse question: What do Central Banks say they are trying to do when lower
by jpadkins 4y ago
Central banks don't say a lot about what they are / are not trying to do. Ask the reverse question: What do Central Banks say they are trying to do when lowering interest rates? They only really make vague statements like 'easing conditions' or 'providing liquidity'.
In the US, we can only go by their stated goals, dual mandate from congress: keep inflation and unemployment low. https://www.stlouisfed.org/in-plain-english/the-fed-and-the-dual-mandate https://www.stlouisfed.org/in-plain-english/the-fed-and-the-...
So what are the mechanisms that they can keep unemployment low (create jobs)? They lower interest rates, which causes people to sell assets that don't create jobs (treasury bills) and buy ones that do (corporate bonds, VC funds, etc) in attempt to get a return on capital (however, with more risk).
It's not some secret that lowering / raising interest rates affects all investors risk curve.
- wpietri 4y agoI of course agree that they are affecting incentives. I am specifically disagreeing with the claim that the "goal of low interest rates was to force savers into riskier assets". Force is the wrong word here, and I don't think individual savers are at all the people the Fed is trying to affect here. And although they are affecting incentives, people are not robotically obliged to follow them. VCs cannot be simultaneously such brilliant investors that they deserve to be wildly rich and also so without agency that a drop in the federal funds rate forces them to waste money on bad startups.