Over the next decade, the US economy will face two big challenges: higher interest rates and AI-generated disruption. Each invites the same solution: policies to keep rates below their market level.
The strategy, also known as yield-curve control, is tempting, and it may even provide an immediate boost to the economy. But messing with rates would be a mistake. Japan’s experience shows that that the long-term costs of keeping rates artificially low far outweigh the short-term benefits.
It’s easy to see the hardship caused by higher interest rates. In the US, rates on long-term bonds (ones that mature in 10 years or more) have trended up since the pandemic. This means consumers pay more for their debt and mortgages. Businesses pay more for loans. The government pays more to service its debt. A lot of the US economy is built around the historically low rates of the last several decades, so the longer rates stay high, the more disruption it will cause.
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
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