MB83229 Are High Interest Rates a Threat to Sustained.pdfVIP

CRS- 1 ISSUE DEFINITION A major question that arises in Congress during its considerations of what policies promote and what inhibit the restoration of a healthy economy is the influence that interest reates exert. In particular, are high interest rates a threat to sustained economic recovery? BACKGROUND The level of interest rates is generally thought to be an important determinant of the course of the economy. On the upswing of the business Cycle it is typical for interest rates to rise eventually; first in response to growing credit demands and then, in the latter stages of the expansion, in response to restraint in the rate of growth of credit imposed by the monetary authority as it moves to keep inflation in check. The dampening effect on economic activity of a highgr level of interest rates sets the stage for recession. Conversely, on the down-swing of the business cycle it is typical for the level of interest rates to fall eventually as credit demands inevitably retreat and as the monetary authority eases its grip on the supply 0f.credit. As interest rates decline they tend *to stimulate economic activity, thereby serving to brake the economyls fall and eventually spurring economic recovery. It is this last role of interest rates -- fostering economic recovery -- which is germane to th.e current state of the U.S. economy. As the economy struggles to recover from a protracted recession, there is considerable Concern as to whether interest rates have fallen to a level, and Will remain at levels consistent with sustained economic advance. Relatively high interest rates are seen as hurting the prospects for economic recovery in several ways. They dampen significantly the demand for highly interest-sensitive output,