While many economists and policymakers supported the Fed's decision to maintain the federal funds rate at a nearzero level for over six years, Charles Schwab, the founder and chairman of a discount brokerage firm that bears his name, argued that the economy was harmed by keeping interest rates low for an extended period of time: U.S. households lost billions in interest income during the Fed's near-zero interest rate experiment.... Because they are often reliant on income from savings, seniors were hit the hardest.... Seniors make up \(13 \%\) of the U.S. population and spend about \(\$ 1.2\) trillion annually.... This makes for a potent multiplier effect. a. What type of spending was Schwab expecting would have increased if the Fed had raised interest rates earlier than it did? b. Would higher interest rates have had an effect on other types of spending? Briefly explain. c. Which of the types of spending that you discussed in answering parts (a) and (b) does the Fed appear to believe has the more "potent multiplier effect"? Briefly explain.

Step by step solution

01

Understanding Schwab's perspective

Charles Schwab suggests that low interest rates negatively impact savers, especially seniors, who depend on the income from their savings. Thus, if interest rates were higher, seniors would have more income which they could potentially spend, boosting consumption.

02

Effect of higher interest rates on other types of spending

Higher interest rates make borrowing more expensive, which can discourage spending that relies on borrowed money such as mortgages or business loans. This could potentially slow down spending in these areas.

03

The Fed's perspective on the 'potent multiplier effect'

Looking at the overall macroeconomic perspective, the Fed likely believes that keeping interest rates low encourages more borrowing and investment which stimulates business growth, employment and eventually consumer spending. This creates a powerful multiplier effect in the economy, more so than boosting the income of a particular group (the seniors in this case).

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