Economists and financial analysts often assume high interest rates are associated with tight monetary conditions and, conversely, low interest rates are associated with easy money. In reality they indicate the opposite because of the supply side of credit.
For example, with low interest rates, there needs to be willing providers (banks providing loans), but low interest rates implies low returns. That’s why there is a positive correlation between interest rates and actual credit issued—there is greater supply when interest rates go up because of better returns.
Milton Friedman’s interest rate fallacy says that lower interest rates are indicative of “tightening money” rather than “easy money”.
Read Milton Friedman’s Interest Rate Fallacy in Monetary Mechanics.
- Lowering the federal funds rate causes all asset classes increase in value
- The stock market boom during the pandemic is due to increased savings
- Nobody grades an economist
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We are probably in a recession later, but we can’t know for sure for another quarter or so. With inflation on the rise and interest-rate hikes making less money available, it will be some time before things grow again.