Why rising interest rates won’t crash the economy … in data

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by Thomas R. Eddlem

It’s an economic article of faith among almost every school of economic thought that central banks raising interest rates curtails economic growth and lowering interest rates stimulates short-run economic growth.

The problem with this assertion by nearly every economist is that the data backs up the inverse proposition.

Lower real (inflation-adjusted) interest rates are statistically associated with slower short-term and long-term economic growth as well as short-term higher prices for housing.

Low interest rates are also the regular and ongoing policy of the Federal Reserve Bank.

Both legislators and economists are currently fretting about “too restrictive” an interest rate policy that could throw the American economy into recession. The Federal Reserve recently raised its Federal Funds Rate—the discount rate to banks—to a nominal rate of 4.5 percent. But the real interest rate (inflation-adjusted by the Consumer Price Index) remains deeply negative and near historic lows (Figure 1)….

To keep reading and see the charts, go to the Libertarian Institute here:


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