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0 pointsusefulcat4y ago0 comments

> The more the Fed distorts normal market signals, like interest rates, the less efficiently capital is allocated

It seems like a 0% fed rate would corresond to a complete lack of 'distortion'--the effective rate is then 100% a 'market signal', no?

I would think--at least according to this author's thesis--that a moderate level of fed 'distortion', in the form of a moderate-but-certainly-not-zero fed rate, would be desirable.

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3 comments · 2 top-level

pclmulqdq4y ago· 1 in thread

A 0% rate distorts the market by giving out money for free in the form of loans. A 100% rate distorts the market by giving out money for free in the form of savings interest. Ideally, the fed funds rate is about equal to the inflation rate. Alternatively, there would be a "no distortion" policy if the rate for savings interest was 0% and the rate for loans was >100%.

imtringued4y ago

A 0% interest rate on debt is actually the ideal interest rate because it implies people save exactly as much as they invest.

The reason why a 0% interest rate on cash distorts the market is that it is inherently a government subsidy when the economy is declining temporarily.

heartbreak4y ago

Do you know what the Fed rate is for?

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