If there is one monetary policy that best represents our current economic state, it has been low interest rates. Compared to any other significant period in history, this time in economic history has been seeing interest rates lower than they've ever been . And under current Fed leadership under Jerome Powell, interest rates appear that they will continue to be staying at historic lows.
According to Reuters (full links to cited articles are always down below), The Federal Reserve kept interest rates near 0 and also decided to make a bold promise that they will basically keep interest rates low "until inflation is on track to “moderately exceed” the U.S. central bank’s 2% inflation target".
The Fed has been using their policy statement in order to begin to pivot from stabilizing the financial markets to stimulating the economy. New economic projections released with such financial statements showed that interest rates hikes will be put on hold until at least 2023.
Global GDP Decline Projection by OECD
The Organization for Economic Cooperation and Development upon the cusps of the Interest rate news by the Fed project that they expect a global GDP collapse of 4.5%.
They are mostly basing this projection based on the fact that many of the sectors that were gravely affected by the lock-downs such as the Travel and Tourism industries have not fully recovered, despite the fact that many sectors are beginning to see re-openings at this stage of the pandemic.
Even putting aside those previously mentioned economic sectors, the fact that 60% of business closures due to the pandemic are expected to be permanent only adds to expectation of continuing decline of GDP and of economic struggle.
What is the core issue with having low interest rates?
While the metaphor may not be entirely accurate to a T, there's a saying that it's best to sometimes start from scratch than to try to revitalize something that's clearly not working.
To contextualize the point that I attempted to make with the metaphor, what maintaining historic low interest rates within a economy causes is that it prevents a needed reset within the economy. Instead of allowing a economic downturn to come and pass naturally, the Gov or Central Banks decides that it is better instead to take measures such as printing more money or in this case, keeping interest rates low, as a desperate ploy in order to both stimulate the economy and also to get it back up and running as quickly as possible.
It's much like if you were to instead of offering drug rehabilitation for someone, you decide to give the person more heroin because you feel that the potential short-term consequences are more important to compensate for then the overall long-term health of the person.
There's also many other economic problems that are caused with keeping interest rates low (one quickly being the potential for Malinvestment), but if I were to continue listing them, this article would basically be a book lol.
If there is one takeaway that I think you should have upon reading this, it's that all of the efforts of the Gov and the Central Banks are only gonna make the problems worse and the only person that can improve your economic well-being is yourself.
The more initiative that you take to improve your human capital and skills, the better value that you will be able to provide in the marketplace and therefore, improve your economic well-being.
Point of the day: Take Action
If you agreed with my takes or have any kind of feedback, let me know down below 💪!
Cited Articles: https://www.reuters.com/article/usa-fed-idUSKBN2670IJ