Interest Rates Should Be Higher, Not Lower

"A free-market approach to interest rates would result in massively higher rates and promote sounder long-term decision-making..."

By Peter Schiff, Schiffgold

Along with Trump, market watchers are salivating for rate cuts. But rates should be higher, not lower—and in a free market, they would be.

In a free market, interest rates are determined by the supply and demand for credit. Savers provide capital (supply) while borrowers like businesses, consumers, and governments create demand. Rates would reflect the real cost of capital. They would balance risk, inflation expectations, and real economic conditions.

Instead, we trust a small handful of individuals with full implied mastery of an infinitely complex system with endless interdependent factors that even they admit they don’t fully understand. It’s absolute madness when this same system, left to its own devices, would self-correct on its own if we allowed it to. In that self-correcting system, rates would be drastically higher than they are now.

All central planning does is distort markets by trying to override the natural order in favor of the preferred reality of bankers, bureaucrats, politicians, and academics. While you can achieve a brief illusion of success, you can’t do that forever. Meanwhile, most people have too little understanding of the dynamics, and too short an attention span to realize what’s actually happening. That includes politicians.

The prevailing popular sentiment always seems to be that we can just make the economy great by declaring lower interest rates and printing money, and that monetary easing is both necessary and inevitable. But while investors focus on short-term gains, the underlying conditions almost never support rate cuts in today’s economy.

Real interest rates are still low by historical standards, and the federal government continues to run huge fiscal deficits. Inflation is still a problem and consumer prices are going to keep going up. Lowering rates even more will make those problems worse.

As Peter Schiff said recently on Fox Business:

“We still have a lot of inflation in the pipeline from all the money the Fed’s been printing over the last, you know, couple of decades.”

Peter also mentioned the inflationary impact of Trump’s so-called Big Beautiful Bill, which adds fuel to the fire the Fed has already lit and stoked:

“Plus we have the Big Beautiful Bill, that is highly inflationary, because of its massive increases in already big deficits. So I think there’s a lot of inflation that’s coming, and you’ve got the impact of tariffs that is lagging a bit, but it’s going to be there.”

As for Powell, in the face of political pressure and opposition in his own ranks, he at least seems to understand that inflation is still too high, staying steadfast that rates shouldn’t be lowered yet. But he even went as far as leaving the door open to hike them (albeit vaguely, as the Fed always does):

“And so now you have Powell saying I’m going to do ‘whatever it takes’ (to bring down inflation), and that is going to require rate hikes.”

Artificially low rates incentivize borrowing, discourage saving, and misallocate capital into speculative ventures. The asset bubbles and malinvestment can take years to unwind, which then leads to calls for even more intervention. That’s the cycle we’re seeing now, and the one we see over and over.

So while Powell is right for not cutting rates, he was already wrong to have dropped them as low as they already are. The bigger and much more important fact is that Powell’s job shouldn’t exist at all. In a free market, rates would be drastically higher, as they would have to go sky-high for the system to properly correct. If left to their own devices, the blatant unsustainability of the US debt would ring all the market’s alarm bells with regard to default, pushing up Treasury yields.

Abysmal personal savings would drive rates higher still, as the average American has basically nothing in the bank, and has retirement accounts consisting of a social security ponzi and 401ks filled with stocks that only go up because the currency keeps becoming less valuable.

Look at US household saving rates as just one basic example. They spiked right around the time everyone got handed a wad of free, freshly-printed money. Now, five years later, they’re even lower than they were before the spike.

US Personal Savings, 10-Year

Global demand for dollars and Treasuries help keep rates down, but as confidence in the dollar drops more and more, rates will have to keep going up to continue attracting that capital. Ultimately, the Fed can only mess with short-term rates, and trying to keep them artificially low can only give the illusion of succeeding for so long.

The market’s desire for lower interest rates is understandable, especially in the face of sluggish growth, instability, and high borrowing costs. Ultimately, the solution is not more central planning or different leadership at the Fed, but abolishing central monetary planning altogether. Rather than waiting for the Fed to “get it right,” policymakers and economists should be asking whether the Fed should be setting rates at all. While more people are asking this question than probably at any other time in modern economic history, the established orthodoxy continues to refuse to regard it as anything but a total non-starter.

A free-market approach to interest rates would result in massively higher rates and promote sounder long-term decision-making, both by investors and by governments. But it would cause tremendous economic pain as the low rate-addicted economy figures out how to grapple with its paper-thin security blanket being ripped away.

It’s hard to imagine a Fed Chair, or president, who would be willing to publicly encourage this kind of reset.

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[QTR’s comments: Peter Schiff isn’t always right. There, I said it. His critics love to point out that he’s been warning about the dollar’s collapse and interest rates spiking for years, yet the dollar still reigns and Treasury yields haven’t gone full 1980s.

Sometimes he’s like the guy who warns the volcano will erupt, only for it to keep puffing smoke for decades while everyone else roasts marshmallows. Timing is not his strong suit, and in a pure free market, rates could swing so wildly that the average retiree’s portfolio might look like it just got tossed down a flight of stairs.

But on the core point? He’s right. We’ve built this fantasy that a group of bureaucrats and academics can “manage” the most complex economy in history without distorting it beyond recognition. Each time they fail, the solution is apparently to give them more control, as if the arsonist just needs a bigger can of gasoline.

Schiff’s argument is brutally simple: in a world without the Fed’s interference, the cost of borrowing would actually reflect reality. And reality is ugly — massive government debt, pathetic savings rates, stubborn inflation, and fading global trust in the dollar. In that world, rates wouldn’t just be a bit higher. They’d be “good luck on your 12% mortgage” higher. Yes, that would nuke the speculative bubbles in housing, stocks, and crypto. Schiff’s point isn’t that this wouldn’t hurt; it’s that the hurt is the cure.

Meanwhile, politicians and investors still cling to the magical thinking that you can make the economy grow by cutting rates and printing money — the economic equivalent of curing liver damage with more whiskey. It might feel good now, but the organ isn’t regenerating. The Fed’s entire playbook amounts to feeding the addiction while calling it medicine.

And here’s the kicker: the Fed can’t control the whole yield curve forever. They can fiddle with short-term rates, but the bond market sets the real terms for long-term borrowing. As foreign demand for Treasuries slips — and it is slipping — the U.S. will have to offer higher yields to attract buyers. That’s when all the carefully worded Fed statements stop working, and the market rips the wheel out of Powell’s hands.]

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