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The downside of low interest rates

Mitchell Hartman Jan 26, 2012

Kai Ryssdal: On the theory that there’s nothing like a little monetary policy to whet your appetite for the news of the day, we’re going to start this Thursday by quoting the Federal Reserve Bank of the United States. They wrapped up a two-day meeting on interest rates yesterday by saying this: There will be “exceptionally low levels for the federal funds rate at least through late 2014.”

That means the Fed’s main interest rate is going to stay near zero for almost another two years. Ben Bernanke and his colleagues are trying to goose the economy by making it cheaper to borrow for a house, a car or, if you own a business, to buy computers or fancy new robotic machines to make your company more efficient and profitable.

But Marketplace’s Mitchell Hartman reports, low interest rates have a few downsides, too.

Mitchell Hartman: For Jim Poterba, worry about low-low interest rates hits pretty close to home.

Jim Poterba: My dad, who’s living on income from CDs: For those who are depending on relatively safe interest income, this is a message that it’s going to be a continued period of difficulty generating that income.

Poterba teaches at MIT and heads up the National Bureau of Economic Research, so you might spare some worry for the retirees in your life, too. Interest rates average just over 0.5 percent now on savings accounts and CDs. In fact, some economists worry the Fed’s policies will lead retirees to shift their nest eggs into riskier investments to get a higher return.

But for businesses, low interest rates are an unmitigated good. They can borrow cheaply: for buildings, or new machinery and the software to run it.

Brookings economist Gary Burtless says in some cases, this may actually keep companies from hiring more people in the long run.

Gary Burtless: The theory is these investments have made businesses so much more efficient that they do not add as much to their payrolls as they otherwise would.

But Burtless says this process generates jobs, too.

Jim Poterba agrees.

Poterba: There’s also someone who’s producing that machine, right? Someone’s assembling the robot, somebody’s writing the software code. And those are the folks that are getting the jobs that are immediately stimulated by the investment.

Poterba says we just have to hope some of these high-paid engineering and technology jobs making all the fancy new equipment stay in the United States.

I’m Mitchell Hartman for Marketplace.

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