Understanding The Interest Rate Fallacy

“After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

–Milton Friedman, “Reviving Japan,” 1998

In this article, I want to take a deeper look at a very common misconception about interest rates, namely that low rates are a sign of easy money and stimulus. This misguided belief can lead people to make incorrect assessments about inflation and, hence, their investment thesis. Today, we cover the “interest rate fallacy.”