Economics
What Drives Interest Rates? Old Question Is Key to New Economics
- Drivers and direction of interest rates are hard to pin down
- Debate takes on new urgency as debt, yields surge in pandemic
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Stripped down to basics, the new consensus in economics goes like this: It’s fine for governments to borrow and spend more money -- so long as they can get hold of it cheaply.
But as a guide to policy, the doctrine has a blind spot. Because even after arguing the point for a couple of centuries, economists find it hard to pin down what drives long-run interest rates -- or predict where they’re headed.
“The greatest area of uncertainty in any forecast is really the forecast of interest rates,” Laura Tyson, a senior economic adviser to the Clinton and Obama administrations, told Bloomberg TV . “The profession has not been great at timing either the direction or the amount.”