2015-09-03

Why Would We Be Less Sensitive To Interest Rates?

Tyler Cowen links to a paper out of the Kansas City Fed, and Scott Sumner discusses it in greater depth. The topic of the day is, has the U.S. economy become less sensitive to interest rates?

I'm not smart enough to say for certain. But, here's a wild conjecture...

Suppose that demand for "necessities" is inelastic; we buy them at almost any price, because we need them. Goods that go in this category are things like "housing" (including rent), "transportation" (including automobiles and bus passes), health insurance, and certain kinds of consumer goods that "everybody has," such as mattresses and large appliances.

Now suppose society made a gradual shift away from cash sales in all of these categories, toward an environment where these things were either leased, rented-to-own, or financed over a period of years. But suppose that, despite this shift, demand for these goods remained inelastic.

If that ever happened, I would expect consumers to be less responsive to changes in the interest rate. Or, more precisely, I would expect consumers to absorb the cost of rate increases as something like "inflation," because they're not going to cut back at virtually any price.

Am I talking crazy-talk?