For millennia, interest rates have been the primary tool for setting the price of money. They have determined how medieval kingdoms financed faraway conquests and modern nations fought wars. They affect everything from the cost of food, shelter and transportation to healthcare and government spending. Even the slightest adjustment is watched intently by investors, home buyers, business owners, presidents and monarchs. The 21st century, however, may mark the end of their usefulness.
Inflation has long been a key driver in setting the level of interest rates. Yet price increases, once considered a curse, have been contained in recent decades. We didn’t see meaningful inflation when trillions of dollars in stimulus flooded the economy after the global financial crisis, nor does it look likely after the gush of fiscal and monetary aid amid the Covid-19 pandemic.
