Economists generally believe the baseline, target rate should be around 2-3%.
Zero interest rate is like steroids. You can take them for a while to pick you up and help fight a bug (like the 2008 crash), but if you don't stop taking them, you'll need a long, painful, 5.5% interest rate rehab.
That was not a "bug." That was a parasite. If you take steroids with a parasite you might just make the parasite stronger.
2008 was caused by inflated housing prices. ZIRP reinflated the housing bubble. This caused people to not be underwater on their mortgages, but now we have an even bigger housing bubble than we did to begin with.
The problem with that is (as we found out) that does not leave you much room to cut without going to near zero rates.
The government reaction to the 2021 economic circumstances was to counter the hot job market, not inflation. It is explicitly and legally the mandate of the federal reserve to target maximum employment first, and 3% inflation if possible.
Inflation has been normal for a while now by most metrics, but rates are still sky-high to crush worker power. This may not be the stated goal, but it is the actual outcome we can see.
The purpose of a system is what it does.
Super-low inflation targets hurt worker negotiating power.
"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
A rate of inflation + 0.5% is double of a rate of inflation + 0.25, that is double of a rate of inflation + 0.125%, that is double of...
You can have as many steps as you want.
The problem with your analogy is that paying interest is an active measure. It takes effort. The higher the rate*(outstanding debt), the more effort. This isn't a choice between injecting nothing vs injecting steroids, it's a choice between injecting sedatives vs injecting nothing. Raising the interest rate is like injecting a sedative. How much sedative should we inject? How much sedative can we inject?
More like adding fat and never burn it. Zero interest means everything stays around, no pressure to produce since there is no expectation of ROI, and then when you suddenly add that pressure a lot of stuff collapses under their own weight since they don't have anything to keep it up.
For individuals in the middle class and lower, high interest rates (and the associated inflation) directly lower the quality of life by eroding their purchasing power.
This confuses me. Rates were raised to reduce inflation. How should inflation have been reduced, if not (at least in part) by raising rates?
Raising rates didn't lower housing prices, it just empowered cash buyers to become landlords.
I have not observed this statement to be true, both in my personal experience and that of those around me.
If it's lower than inflation, the government is just giving free money to the corporations with access to interbank settlement loans.