Matters Of Interest

It’s widely believed that high interest rates act as brakes on economic activity. But do they? Today, we re-examine our fringe view that perhaps the economy is so strong because of high interest rates, not despite them. After all, Fed tightening hasn’t produced the expected lagged economic effects; consumer spending hasn’t flagged as it does before recessions. On the contrary, consumers are spending briskly despite higher debt-servicing costs. That’s because on the whole they benefit more from high interest rates than not, via incremental nonlabor income. … Also, the flip side of an unsustainably growing federal deficit: The interest paid by the government to consumers holding Treasury debt is a boon for the economy.