Fed Rate Hikes Expose Decade of Cheap Money’s U. S. Fallout
Here is the article to be refined:
The Federal Reserve’s interest rate hikes aren’t just about cooling inflation. They’re a symptom of a deeper ailment: the after-effects of a decade of ultra-low rates.
For years, the Fed kept rates near zero, a policy intended to stimulate the economy after the 2008 financial crisis. It worked, to some extent. Unemployment fell, and the stock market boomed. But it also created a landscape where cheap money fueled asset bubbles and encouraged excessive risk-taking.
As economist Adam Posen [https://www.piie.com/experts/senior-fellows/adam-s-posen] of the Peterson Institute for International Economics, puts it, “Low rates became an addiction. Companies and investors came to rely on them, and now the withdrawal is painful.”
The current inflation spike, driven by supply chain disruptions and increased demand as the pandemic eased, has forced the Fed’s hand. But even if inflation subsides, the underlying problems created by the era of cheap money will remain.
One key issue is the misallocation of capital. Ultra-low rates incentivized investment in projects that wouldn’t be viable in a normal interest rate environment. “We’re seeing a lot of zombie companies kept alive by cheap debt,” says financial analyst Karen Petrou [https://www.federalfinancialanalytics.com/about-us/our-team/karen-shaw-petrou]. “Now, those companies are facing a reckoning.”
Moreover, the extended period of low rates exacerbated inequality. Asset owners benefited disproportionately from rising stock and real estate prices, while those without assets saw their purchasing power eroded by inflation.
The Fed’s rate hikes are a necessary, but blunt, instrument. They may bring down inflation, but they also risk triggering a recession and further exposing the vulnerabilities created by years of unconventional monetary policy. The challenge now is to manage the fallout from the era of cheap money and build a more resilient and equitable economy.
