When interest rates are not set by market forces, the result is mis-directed investment. The Fed is currently holding interest rates artificially low. In recent years, this has resulted in booms in the stock market and in housing. Low interest rates also impact the value of the dollar, since holders of dollars would be motivated to sell them and buy currencies where they can invest at higher interest rates.
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In addition to provoking booms (and the inevitable busts that follow), a less visible, but equally important effect of artificially low interest rates is a massive transfer of wealth from the US to countries with stronger currencies. This happens in several ways. Capital flight for interest / yield reasons, as described above. Imported goods become more expensive, transferring wealth from US consumers to those companies in the form of increased cash flow. And the sale of US-based dollar-denominated assets at artificially low prices -- which is the reason why so much US infrastructure is now owned by overseas investors (refineries are owned by the Arabs, much of Los Angeles downtown is owned by the Japanese, etc). Those transactions are transfers of wealth because they are happening at below-market prices.
The interesting thing is that this is exactly what happened in the years before the Great Depression in 1929. The Fed artificially lowered interest rates in an intentional move to prop up the British economy. Massive amounts of wealth were transferred to England. The low rates triggered stock market speculation with a resulting boom & bust. The economy couldn't recover quickly after the stock market crash because the foundational strength was gone. The difference today is that the amount of wealth being moved out of the country is much greater -- which leads one to believe that the ultimate result has the potential of being much worse....
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