Thread: A Low Fed Interest Rate

From what many people have been saying, and what appears to be true, the incredibly low interest rates of the Fed are causing huge damage to the middle class because of inflation.

Inflation should be incredibly harmful for the middle class because the middle class needs to save up money to advance upward on the economic ladder. Money needs to be saved to buy a new home, upgrade something in a company or buy a better house, and inflation will make those savings goals harder.


However, whenever people bring up the problems with a low interest rate and high inflation I only hear an informal analysis of the problems with a low interest rate, instead of any real numbers. I was wondering if maybe the increased ease that people could borrow money with a lower interest rate would actualy spur bussines enough to reduce alot of the damages to the middle class, or even be good for them despite the inflation.

I do not have much specific economic knowedge about the fed's interest rate, so if anyone can wiegh the option of a low or high interest rate, I would be curious what those people think.

Inflation may be very bad, but I have no way of knowing if the economic growth from a low interest rate will counteract the inflation.

Originally Posted by Nerv14

From what many people have been saying, and what appears to be true, the incredibly low interest rates of the Fed are causing huge damage to the middle class because of inflation.

Inflation should be incredibly harmful for the middle class because the middle class needs to save up money to advance upward on the economic ladder. Money needs to be saved to buy a new home, upgrade something in a company or buy a better house, and inflation will make those savings goals harder.


However, whenever people bring up the problems with a low interest rate and high inflation I only hear an informal analysis of the problems with a low interest rate, instead of any real numbers. I was wondering if maybe the increased ease that people could borrow money with a lower interest rate would actualy spur bussines enough to reduce alot of the damages to the middle class, or even be good for them despite the inflation.

I do not have much specific economic knowedge about the fed's interest rate, so if anyone can wiegh the option of a low or high interest rate, I would be curious what those people think.

Inflation may be very bad, but I have no way of knowing if the economic growth from a low interest rate will counteract the inflation.

Better late than never Nerv14, yes it has kept the dollars value low. Here is a question for you, don't you think they knew that, and the problems that it would cause?

Originally Posted by Nerv14

Inflation may be very bad, but I have no way of knowing if the economic growth from a low interest rate will counteract the inflation.

Well, economics is not an exact science. The target figures used by central banks are pretty arbitrary (why 2% and not 2.15%?), and it is more important to have a "low" target than to have no target at all.

Some work has been done to empirically prove that the rates used are in keeping with ideal of maximizing growth:

The employment maximizing rate of inflation for these equations ranges between 1.6 and 3.2 percent.
Near Rational Wage and Price Setting and the Long Run Phillips Curve - Brookings Institution

Originally Posted by Latherty

Well, economics is not an exact science. The target figures used by central banks are pretty arbitrary (why 2% and not 2.15%?), and it is more important to have a "low" target than to have no target at all.

Some work has been done to empirically prove that the rates used are in keeping with ideal of maximizing growth:

The employment maximizing rate of inflation for these equations ranges between 1.6 and 3.2 percent.
Near Rational Wage and Price Setting and the Long Run Phillips Curve - Brookings Institution

1.6% to 3.2%... I looked at the first few paragpaphs of your article because anything more would be much too complicated for me. Thank you, though it is good to see what the "experts" feel about this, even though there is no real way for me to check the way that they got to their answer.

Originally Posted by michaelr

Better late than never Nerv14, yes it has kept the dollars value low. Here is a question for you, don't you think they knew that, and the problems that it would cause?

Anyone can just say that the government is trying to screw most of us with a low interest rate, which they seem to be doing because inflation is much higher then the acceptable level, but I just want to see the government's side to this.

As Allan Greenspan said, politicians look for immediet approval from fed activity, when in reality fed activity is about long term results. Regardless if we trust him or not, I want to hear both sides of the story.

Originally Posted by Nerv14

1.6% to 3.2%... I looked at the first few paragpaphs of your article because anything more would be much too complicated for me. Thank you, though it is good to see what the "experts" feel about this, even though there is no real way for me to check the way that they got to their answer.



Anyone can just say that the government is trying to screw most of us with a low interest rate, which they seem to be doing because inflation is much higher then the acceptable level, but I just want to see the government's side to this.

As Allan Greenspan said, politicians look for immediet approval from fed activity, when in reality fed activity is about long term results. Regardless if we trust him or not, I want to hear both sides of the story.

You want to see the governments side, I would like to see them answer for it. Do you realize that fuel, food and everything else should be way more affordable? There is absolutely no reason for $4.50 gasoline, and it's getting worse. They knew the ramifications of an artificially low interest rate, they had to after all Joe Stupid does. No they fucked us over, on purpose.

Originally Posted by michaelr

You want to see the governments side, I would like to see them answer for it. Do you realize that fuel, food and everything else should be way more affordable? There is absolutely no reason for $4.50 gasoline, and it's getting worse. They knew the ramifications of an artificially low interest rate, they had to after all Joe Stupid does. No they fucked us over, on purpose.

Right now I completeley agree with you, and I am sure I always will because I don't think the government has a good reason for incredibly low interest rates. But we need to at least ask someone to try and explain the government's side. (even though I don't think anyone will or is able to) but who knows.

The government side is, and I kid you not, that temporary (more than 40 years and counting) instances of increasing marginal returns in computers, biotech and communications are non-material inputs. In other words that the amount of computer memory/$1 doubling every two years can be ignored. (Actually the doubling period is irregular. From the IBM 360 to the Commodore 64 was in the range of 60% increasing returns instead of the 41% of Moore's law. 1984 to 2004 was closer to 20% for motherboards but was much higher for special boards and memory peripherals as in I have no idea how to compare cassette memory to hard drives but I suspect a 41% overall average is low. These are my own estimates based on prices I saw and/or paid for computers and how much memory I got for my money. Adjusting for inflation raises these figures a lot.)

A more honest answer is when the supply cost curve declines at a rate equal to or greater than the demand utility curve the results cannot be modeled. Therefore they are not. Ever larger areas of the economy fall into this catagory such as: biotech, communications, nano-tech and material science. Neither the fed nor anyone else can give a defensible answer on how to make economic/monetary policy conform to these parts of the economy.

Originally Posted by william the wierd

The government side is, and I kid you not, that temporary (more than 40 years and counting) instances of increasing marginal returns in computers, biotech and communications are non-material inputs. In other words that the amount of computer memory/$1 doubling every two years can be ignored. (Actually the doubling period is irregular. From the IBM 360 to the Commodore 64 was in the range of 60% increasing returns instead of the 41% of Moore's law. 1984 to 2004 was closer to 20% for motherboards but was much higher for special boards and memory peripherals as in I have no idea how to compare cassette memory to hard drives but I suspect a 41% overall average is low. These are my own estimates based on prices I saw and/or paid for computers and how much memory I got for my money. Adjusting for inflation raises these figures a lot.)

A more honest answer is when the supply cost curve declines at a rate equal to or greater than the demand utility curve the results cannot be modeled. Therefore they are not. Ever larger areas of the economy fall into this catagory such as: biotech, communications, nano-tech and material science. Neither the fed nor anyone else can give a defensible answer on how to make economic/monetary policy conform to these parts of the economy.

damn that sucks for us and is good for our government if we can't prove that they are screwing us.

Look, low interests rates are good for businesses, and that is IT. Lower interests rates are good for the general consumer at a point, but that point passed once it went lower than around 4-5%. The only 2% rate anyone gets regularly is a money market or a CD, and that sucks. Otherwise, unless a credit card gimmick, you don't get that rate. Meanwhile, the dollar loses bigtime value on the world market, as we have seen. Th dollar was well overvalued a few years ago. We've seen a steady decline over the past three years or so. The dollar started dropping over a year ago, alone, because of its overvalue. Then the housing crisis came upon, then higher oil, then possible recession, then slightly higher unemployment. In the meantime, the Fed has been dropping interest rates, which makes the dollar even more worthless. The main reason your paying 4+ dollars at the pump is highly related to the massive interest rate drops made by the Fed to help businesses correct their own foolish mistakes. And there ain't a thing anyone of us can do about it.

The Fed foolishly believed that if it kept rates low and injected more liquidity the Stock Market would rebound from its lows due to the Housing debacle that Greenspand and Co created.

Unfortunately even though the Fed rate is @ 2.25% banks are keeping rates high because they are afraid of lending and people are afraid to borrow due to all the shady loans a lot are stuck with as a result of the mortgage crisis.

Now those artificially lower rates are coming home to roost in the form of inflation. We mostly are seeing it in energy costs ie. oil but it is starting to spill over into everything.

Thank god for the Fed, as the late George Carlin said "They dont give a fuck about you, they dont give a fuck about you, let me repeat that they dont give a fuck about you"