Posted on 07/07/2025 6:07:41 PM PDT by Angelino97
Are interest rates too high?
A lot of people think they are, and a growing chorus of voices is calling on Federal Reserve Chairman Jerome Powell to cut rates.
Are they right? Does the central bank need to step in, slash interest rates, and loosen monetary policy?
The honest answer to the question is that nobody really knows. However, from a historical perspective, interest rates are low, and monetary policy remains loose.
What Are Interest Rates?
Before we delve into whether the current interest rate environment is too high or too low, we need to understand exactly what an interest rate is.
Fundamentally, it is a price – the price of borrowing money.
Since interest rates are prices, they behave in the same way as any other price in a free market. As the demand for money increases, interest rates (the cost of money) tend to rise. When the demand for money wanes, rates fall. In other words, if left alone, interest rates will set themselves based on market activity.
When central planners intervene and "set" interest rates, it inevitably creates problems.
Think about it. Would you trust government central planners to set the price of tennis shoes? Or iPhones? Or automobiles? Imagine what would happen.
In fact, we don't have to imagine. We have countless examples of government price controls going haywire. Inevitably, we end up with shortages and/or overproduction.
For example, in 1971, President Richard Nixon implemented wage and price controls. It was a disaster. Price ceilings intended to hold costs down led to widespread shortages, particularly in meat, gasoline, and other essentials. Businesses weren't willing to sell at unprofitable prices.
Or consider the impact of minimum wage laws. These price floors also distort the market. They raise the pay of some workers, but it also lowers demand for workers more generally, leading to higher rates of unemployment.
The problems with price fixing are entirely predictable given that prices serve as signals in the economy. Distort the signals, distort the economy.
Economist Thomas Sowell explained the fundamental role of prices in his foundational book Basic Economics.
"Each consumer, producer, retailer, landlord, or worker makes individual transactions with other individuals on whatever terms are mutually agreeable. Prices convey those terms, not just to the particular individuals immediately involved but throughout the whole economic system – and indeed, throughout the world. If someone else somewhere else has a better product or a lower price for the same product, that fact gets conveyed and acted upon through prices, without any elected official or planning commission having to issue orders to consumers or producers – indeed faster than any planners could assemble the information on which to base their orders."
Generally, central planners have noble intentions. They want to eliminate some "unfairness" or right some perceived wrong. But in effect, they obliterate these important signals. This causes chaos and confusion. Inevitably, we end up with misallocations of resources. The economy becomes less efficient. Markets cease to function. As a whole, society becomes poorer.
In effect, government action distorts, and in some cases, obliterates the price system. As economist Ludwig von Mises explained, "prices are by definition determined by people's buying and selling or abstention from buying and selling. They must not be confused with fiats issued by governments or other agencies enforcing their orders by an apparatus of coercion and compulsion."
"Prices are a market phenomenon. They are generated by the market process and are the pith of the market economy. There is no such thing as prices outside the market. Prices cannot be constructed synthetically, as it were."
Given this history, why would you want these central planners trying to set one of the most important prices in the economy – the price of money?
The results are exactly what you would expect. Central bank interest rate manipulation has distorted the economy, incentivized unsustainable levels of debt, driven boom-bust cycles, and generally wrecked the operation of the economy.
Are Interest Rates Too High?
This brings us back to the original question. Now that we understand the nature of interest rates, it should be clear why we can't answer the question. Not even the brain-trust at the Fed can possess and process all the information necessary to accurately "set" any price, much less the price of money.
However, we can look back in time and see how the current interest rate environment compares with the past.
Historically, rates aren't high.
As you can see from the chart, the Federal Reserve funds rate peaked just above the level of the 2006 peak. (You'll also want to note the steep decline in rates beginning in 2006, long before the 2008 financial crisis and Great Recession.)
You'll note a general downward ratchet effect in rates over time. Each interest rate peak preceding a bust gets lower as the economy has become more addicted to easy money.
In effect, the economy needs bigger doses of the easy money drug to reinflate the bubble each time through the cycle.
The most notable aspect of the chart is the nearly 10 years of zero percent interest rates following the 2008 financial crisis. This is the real outlier. However, we have millions of people working in the financial sphere who have never experienced a "normal" interest rate environment during their careers. They imagine that zero is closer to the norm than five-and-a-half percent.
The current low-interest-rate environment (from a historical perspective) becomes even more apparent if you look at the real yield (inflation-adjusted) on the 10-year U.S. Treasury.
Keep in mind, the central bank has far less control over rates on the long end of the curve. Supply and demand have a bigger impact on these rates. But even as the demand for U.S. debt has sagged, Treasury yields are still low from a historical standpoint.
The bottom line is that monetary policy remains historically loose. The Chicago Fed National Financial Conditions Index reflects this reality. As of the week ending June 27, the NFCI stood at -0.50. A negative number reflects historically loose financial conditions.
When Too Loose Is Too Tight
While interest rates remain historically low, they may be too high for the current economic environment.
Year after year of zero percent rates since 2008 has incentivized staggering levels of debt. Debt-burdened economies don't perform well in high-interest rate environments.
Furthermore, an economy addicted to the easy money drug needs bigger and bigger fixes to maintain the high. This is why we've seen more extreme monetary policy during each subsequent economic downturn.
Given the economic environment, it makes sense that President Trump and many others want rate cuts. While rates are historically on the loose side, they may well be too tight for current conditions.
However, we find inflation lurking on the other side of the coin.
Low interest rates are inherently inflationary. They incentivize borrowing. Given the fractional reserve nature of the banking system, new loans mean new money injected into the economy. This is, by definition, inflation.
In fact, the money supply has been increasing for over a year. Again, this is inflation.
So, Powell & Company isn't wrong to be concerned about cutting rates too fast. It could lead to another bout of price inflation.
The Fed's inaction is exactly what you would expect given the Catch-22 it finds itself in. It simultaneously needs to cut rates to prop up the easy money-addicted economy and hold rates steady (or even raise them) to keep inflation at bay.
The bottom line is that Federal Reserve monetary malfeasance has completely distorted the economy. The central bank has squeezed itself between a rock and a hard place. The reality is that there isn't a good choice between economic malaise and inflation.
The question is what path with they take?
Trumps’ call to lower interest rates, rewards borrowers at the expense of savers.
Reducing the cost of borrowing will stimulate economic activity and lessen the burden of existing debt, but reckless borrowing encouraged by low rates is a big part of the reason that we have this huge debt problem to begin with.
It's a Milton Friedman talking point.
“It’s a Milton Friedman talking point.”
FALSE!
No.
Need to hold at the current rate or even increase by 50 or 100 basis points to get back to “reality”. The Fed was a decade/years too late in raising rates after the 2008 “GFC”.
Milton Friedman famously stated that “inflation is always and everywhere a monetary phenomenon,” meaning it is primarily caused by an increase in the money supply outpacing economic output. He argued that government spending plays a significant role in creating inflation, as only governments can print money.
Recession, by definition, pretty much has a negative growth rate.
I could go as high as 0.25 as an Inflation Target.
[I know that the only way out of the Yuge Debt of/for America is to inflate the currency, with actual economic growth alongside.]
Interest rates need to be larger than inflation.
Yes. Next question?
In the consumer Market interest rates are theoretically based on risk as well as return. Higher risk borrowers pay higher rates of interest to justify the risk to the lender. This has also been distorted by government interference in a number of ways.
I’m so tired of people whining about the interest rates. They are not high. Anyone remember when interest rates were truly high? Think back to 1980 before Reagan got hold of the economy.
The drastic cuts started after 9/11 to jump start the economy. Excessively low rates caused banks to start charging their b.s. fees for everything including paper clips (j/k)
0% interest rate should never be a goal. ! Some people are on fixed incomes and are using CDs interest rates to supplement SS.
One interest rate that should be slashed is credit card rates which are criminal imo. I don’t have running balances on CCs anymore but I’m not young anymore either. Younger people get hammered by those rates some into bankruptcy. Although a different type of credit, it is still a short term loan.
Items from the thread:
“Interest rates should be 3% above inflation! And the inflation target should be 0%.”
Except that sentence 1 did not attach to sentence 2. Inflation in the latest PCE was ticked up to 2.8%. So . . . that is calling for Fed Funds of 5.8%.
BTW has anyone ever done a historical calendar analysis to determine how often Fed targets are hit? Say, within 6 months of declaring it?
What creates inflation? Buyers being more urgent than sellers — which is a pretty easy configuration to see in food.
Not really clear how the Fed Funds rate addresses urgency to eat.
1) Inflation is at 2.4%, about half of the interest rate.
2) During Democrats’ time in office, the overnight lending rate has gone WAY below inflation, stuck at zero for almost of Obama AND Biden’s entire time in office, while quantitative easing meant the government was buying all of the government-issued debt.
3) The very time it would make sense to allow inflation to exceed interest rates would be if inflation were artificially boosted by importers passing on tariffs, since that would mean that any present inflation is not indicative of future inflation.
I remember when banks returned my canceled checks.
Then banks started keeping my canceled checks "for my convenience," and instead sent me a photocopied page showing my canceled checks.
They said I could still receive my canceled checks for a $2 monthly service charge.
Then banks stopped sending me photocopies of my canceled checks, or even my bank statements. They wanted me to go "paperless." Once again "for my convenience."
Every time some corporation (banks, airlines, hotels, insurance companies) change their policies "for my convenience," it becomes both less convenient and more expensive.
Lowering interest rates is like a hit of crack cocaine. It feels good for a while. Then it leads to destructive long term consequences.
They are lower than they were in the 1980’s and 1990’s but we managed.
Kids today just want excuses for failing to thrive. Always an excuse.
Amazing isn’t it? Amazing how an “independent” and supposedly apolitical FED can raise rates in every Republican presidency and send them crashing down for every democrap.
Too high? Maybe by a point but not by too much. What we need are steady and normal rates. I would never loan money at the very low rates we have seen. In fact, I did not, even to my own son. The roller coaster we have ridden for more than 70 years has not helped anyone. The FED has hardly done what they claim they intend since we have had multiple rounds of upset in the economy. Hardly stable at all.
Right...
Yep, about right, we'll probably have two .25 basis point cuts this year, sounds right.
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