Earlier this month, the Bank of England did something never before seen in its 322-year history. It cut its key interest rate to just 0.25%.
A few years ago, this might have been remarkable. It means banks in the UK can borrow money from the central bank for next to nothing, Business Insider reported.
But in 2016, a "historic low" for interest rates is a superlative repeated so often that it doesn't get much notice anymore.
In fact, if the UK's central bank cuts its benchmark interest rate again—to 0%—it will only be catching up to its major counterparts.
Policymakers in the US, Japan, and Europe have already cut rates to or below 0%, and collectively this means that something is happening that has never before been seen in at least 5,000 years of recorded history. In fact, some central banks are paying other banks to borrow money.
They're doing this to spur economic growth. The problem is it's not clear that it is working while falling rates are creating new risks for investors around the world. And raising them, as the US Federal Reserve is trying to do, will create a whole host of new problems for investors and businesses that have to be weaned off such a unique setup.
A Revolutionary Idea?
The decision to lower interest rates isn't itself a particularly revolutionary idea. Policymakers like the US Federal Reserve raise and lower rates as a way to either slow or stimulate the economy.
The basic premise of a rate cut is that it affects the financial system by resulting in lower rates at banks and other consumer-lending institutions. Lower interest rates make it cheaper and more appealing for people and businesses to borrow. They also incentivize people and companies to lend, or invest money because parking it in the bank is pointless.
So businesses build factories and hire workers for those factories (who in turn go out and spend their new wages), people buy homes that need to be built and paid for—and all of this lifts the economy out of a funk.
In December 2008, Ben Bernanke, then chairman of the Federal Reserve, faced the worst economic downturn since the Great Depression and decided that the best response to the crisis was to adopt the unprecedented 0% Federal Funds rate.
The Federal Reserve said in its historic statement: In particular, the committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
"Some time" turned out to be seven years, as the Fed and current Chair Janet Yellen increased rates off 0% in December 2015. Even with the hike, the Fed rate is higher by just one-quarter of 1% and is likely to remain under 1% for some time.
America Leads the Way
The biggest target for stimulus is everyday people. Get people back in their jobs and they spend money and create wealth and drive the global economy forward.
Most data point to the fact that the average person is, in fact, doing better off than when the great experiment of low rates began.
According to Euromonitor, the global growth rate for both consumer expenditures and disposable income has rebounded from their troughs in 2009 to around 3% for each.
The labor market has responded as well as could be expected. The unemployment rate has fallen under 5%, the number of job openings is near record levels, and wage growth is picking up.
For many consumers the low interest rates have been a boon. Consumption by Americans has been one of the strongest economic stories of all, and has returned to prerecession levels. In these respects, the low interest rates have done exactly what they were designed to do.
However, the picture is not as rosy for many economies outside of the US.
Eurozone unemployment has stayed well above its pre-crisis low, and in Japan, the nominal GDP is just now returning to its average from before the crisis.
And although profits of companies in the US, Japan, Germany, and the UK initially rose to post-crisis highs—many businesses are still not investing in large, long-term projects. Investment by US companies is now declining on a year-over-year basis—which is a clue that executives are worried about the future.
