The Great Interest Rate Debate

Peter Coy: Hi, Paul. The Fed meets Tuesday and Wednesday to talk about interest rates, which many voters are really frustrated about. In the past few Times Opinion focus groups, we’ve had voters across the ideological spectrum express high concern about rates. You can also see it in the latest University of Michigan surveys of consumers. Inflation haunted many Americans, and now interest rates bedevil them in a different way. People are saying high rates make it hard to buy a home or car or deal with debts. They’re worried about how high rates may affect their children. Some say they were promised that rates would go down, and they’re losing patience. Some are blaming President Biden and saying things were better under Donald Trump. Polls show voters trust Trump over Biden on the economy.

I get some of this but not all of it. What do you think?

Paul Krugman: Hi, Peter. We eventually need to get into the underlying economics — why are interest rates high, and will they stay there? But first, on how interest rates influence people’s views, we need to deal with an odd aspect of the situation.

High interest rates are, indeed, a burden on some Americans, especially first-time home buyers. And that could explain why some people feel bad about their financial situation, despite low unemployment and rising real wages.

But here’s the odd problem: Generally speaking, people don’t feel bad about their financial situation. Survey after survey, including the just-released annual Federal Reserve survey of economic well-being, finds most Americans say that they are doing OK. Many are positive about their local economies — that is, what they can see personally. Yet they insist that the national economy is a disaster.

There are various stories we can tell about this disconnect, none of them completely satisfying. But let me at least advance one story about interest rates: Given that many Americans, for some reason, are determined to be negative about the economy and inflation has subsided, interest rates give them an alternative peg for their discontent.

In other words, interest rates are a real issue, but what people say about them may be rationalization rather than reality.