Low Interest Rates Fuel Debt, Financialization, Not Growth

The Federal Reserve's decision to keep interest rates low for an extended period has had unintended consequences on the US economy. The conventional economic understanding is that lower interest rates stimulate growth by making borrowing cheaper, but recent data suggests this may not be the case.

A study of non-residential investment, which accounts for a significant portion of GDP, shows little correlation with interest rates over the past 25 years. This suggests that other factors such as animal spirits, technology, trade policy, and regulation have a greater impact on investment cycles.

Low interest rates have encouraged debt accumulation, financial engineering, and worsening inequality, rather than productive investment. The Fed's policy has shaped incentives that steer the economy away from real economic activity towards financial transactions.

The article cites Federal Reserve Chairman Kevin Warsh as acknowledging that short-term interest rates might be restrictive for some parts of the economy, but not for financial markets. It recommends that the Fed reassess its role in increasing financialization and its impact on maximum employment with stable prices.