The downside of low interest rates (updated 1/2/2026)

Columnist Jeff Sommer published a piece called, "Dealing With the Dark Side of Low Interest Rates" in the May 17 edition of the New York Times. Mr. Sommer’s take is refreshing.  Monetary Doves and Pols on both sides of the aisle typically ignore the ill effects of low interest rates on conservative investors and senior citizens who receive abysmally low returns from their fixed income investments and don't have the time horizon for riskier investments.  

Mr. Sommer points out that in an ultra low rate world, retirees and those approaching retirement, are left with three poor choices... 

“Live on less, dip deeply into savings or take on more risk…”. 

A steady trough of cheap money and easy credit induces bad decisions that impact all of us.  As mentioned in this space over five years ago, a perennial ultra-low rate environment coupled with lax credit standards, was one of the factors that enabled the masses to over leverage and buy homes they couldn't afford before the housing bubble burst.  

Business vector created by dooder - www.freepik.com

We hear much about the economic benefits of low interest rates including increased capital investment and consumer spending; but there's also a down side.  

Asset bubbles and inflationary pressures strike us all when the cost of credit stays too low, too long.  Yet, it's still easy to find pundits and politicians who always advocate for lower interest rates.  Cheap money.  Who's not for that?

As for the once unthinkable prospect of the FOMC taking short terms rates below zero (a scenario also cited in Sommer's column); it was comforting last week to hear Fed Chairman Powell publicly tamp down the likelihood.  

---------------------------------------------------------------------------------------------

1/2/2026 -- AI sourced supporting research for this post follows:

1. Chicago Fed: Underpriced Risk and Liquidity

The Federal Reserve Bank of Chicago has detailed how "easy money" environments fundamentally alter lender behavior.

• Underpricing Risk: Research shows that excess liquidity encourages lenders to be overaggressive, often underpricing the risk of loans in hopes that growth will offset future losses.

• Historical Correlation: Analysis of the last 200 years of stock market bubbles indicates that, excluding war years, every major bubble occurred during periods of low inflation and low interest rates.

2. IMF (2025): Stretched Valuations and Stability

The most recent Global Financial Stability Report (October 2025) warns that the legacy of low-rate environments continues to pose risks.

• Valuation Disconnect: The report finds that financial stability risks remain elevated because asset prices are stretched well above their fundamental values.

• Nonbank Vulnerabilities: It highlights that nonbank financial institutions (NBFIs), which grew significantly during the low-rate era, now act as "liquidity providers" in ways that could amplify market shocks if valuations suddenly correct.

3. Richmond Fed: The Housing Bubble Precedent

The Richmond Fed has published extensively on how low rates create "the perfect environment" for speculative bubbles.

• Speculative Shifts: Their research suggests that when returns on safe assets drop, investors speculate on riskier assets like housing to find yield, a primary driver of the early 2000s housing boom.

• Financial Frictions: Another brief explains that bubbles increase the net worth of borrowers artificially, which temporarily eases credit but leads to severe "bubbly" recessions when the prices collapse.

4. European Research: Impact on Savers and Pensions

Studies for the European Systemic Risk Board (ESRB) and other EU bodies focus on the demographic toll of "low for long" rates.

• Solvency Pressures: Protracted low rates put immense pressure on the solvency of pension funds and life insurers that provide long-term return guarantees.

• Retirement Adequacy: The OECD notes that these environments force institutions to scale back benefit promises, directly impacting retirement income adequacy for conservative savers.

---

Research Summary for Your Blog Post

Research Source	Key Supporting Document	Core Conclusion
Chicago Fed	Asset Price Bubbles Report	Low rates lead to excess liquidity and underpriced risk, fueling bubbles.
IMF (2025)	Global Financial Stability Report	Stretched asset valuations and nonbank financial risks threaten stability.
Richmond Fed	Asset Bubbles & Imbalances	Low rates were a primary factor in the housing bubble of the early 2000s.
ESRB / OECD	Macroprudential Policy Report	Savers and pension beneficiaries bear the brunt of low-for-long environments.