- Low-interest rates make it cheaper to borrow, but the downside is it’s much less lucrative to save.
- While the Fed padded against the pandemic’s fallout, the nation’s top earners padded their wallets with low-interest rates.
- “It is a vicious cycle, and we are stuck in it,” Mian tweeted. In other words, it may not be the Fed’s fault, which means it will be much harder to solve.
Ben Winck from Insider writes:
“Rock-bottom interest rates. They make it cheaper to borrow, less lucrative to save, and are meant to boost economic activity.
The Federal Reserve‘s benchmark interest rate has become its go-to tool for turning the dial up or down on spending as necessary. But the rate has been on a decades-long decline and currently sits near zero as the US emerges from recession . That long slide to record lows risks new headaches for the economy.
The problem, as Insider has previously reported, is that low interest rates not only support the economy, they help the wealthy enjoy significant appreciation of their investments. As the Fed padded against the pandemic’s fallout, the country’s top earners padded their wallets.
The Fed has taken flak for the trend, with economists warning that near-zero rates worsen inequality. But what if that narrative is wrong, and the wealthy are behind rates’ steady decline instead of the Fed?
The conventional argument should be flipped on its head, according to a study published Friday by the National Bureau for Economic Research. Wealthy Americans’ booming income powered the decades-long decline in interest rates, economists Atif Mian, Ludwig Straub, and Amir Sufi wrote. That downtrend then lifted stocks and most recently powered the market’s rebound from 2020 lows.
“It is a vicious cycle, and we are stuck in it,” Mian wrote in a Tuesday tweet. In other words, it may not be the Fed’s fault, which means it will be much harder to solve…”
See full story here.