Question

Interest rates in US have been at historically low levels. Discuss any negative implications of low interest rates in the long run. What might be the negative consequences of continued lowered interest rates for a long-term period? Please be specific in your response and try to give some examples along with references, Thank you!

Answer 1

Negative implication of low interest rate in the long run can be that economyis not showing any kind of growth and economy has completely matured and there is also an expectation of impending recession because of which there is a regime of low interest rate because there is a higher expectation that demand is not going to go up and inflation is also remaining at the lower level so Central banks are not increasing the interest rate and they are trying to cut the interest rate in order to inflate the demand.

Negative consequences of continued lowered interested for the long period of time would be that economy would not be able to attract investment with lower interest rate and people will be start to invest into other countries because they will be offering with higher interest rate and it will also mean that Federal Government and federal central bank is charged with too much of debt as they are trying to provide interest rate lower in order to inflate the demand into the economy and that is resulting into a hit into the books of accounts of the Federal Reserve and it will also mean that the currency of the country is going to depreciate in the longer perspective.

It can be seen that when there is a continued sustainability of lower interest rates that will have a negative implications on domestic currency because domestic currency is going to depreciate against foreign currency when there is a sustained lower interest rate regime.

It can also be seen that when there would be lower interest rate like there is a lower interest rate regime in United States during the recent coronavirus crisis and there is a high expectation of impending recession and lower employment in the economy as well because it is a negative sign when economy are trying to lower interest rate in order to inflate the demand.