What are the negative effects of low interest rates?
Reducing the net interest margin (interest income minus interest expenses), which is the difference between the amount of interest payments received and the amount of money that needs to be issued to finance the payments in a given period.
A good example of this is the difference between the interest payments on deposits and loans, which pay interest over a certain period. If interest rates fall, so will the demand for loans, which will lead to an increase in the loan supply and, thus, increase the loan supply, which will increase the demand for loans. This is the cycle that economy enters when growth slows or slows, as it were, to prevent runaway inflation.
A second benefit of low interest rates is that they can raise asset prices. When the Fed lowers the federal funds rate, borrowing money becomes cheaper; this entices people to put money into the financial system, which causes the price of bonds to increase; thus, we see bond interest rates increasing.
A third benefit of low interest rates is that they can raise money out of thin air. When the Fed increases the federal funds rate, the public finds itself with more money balances than it wants to hold. In response, people use these excess balances to increase their purchases of goods and services and of assets like houses or corporate equities.
A fourth benefit of low interest rates is that they can raise asset prices. When the Fed lowers the federal funds rate, the public finds itself with less money balances than it wants to hold. In response, people use these excess balances to raise their purchases of goods and services and of assets like banks or corporations.
