Interest Rates are Interesting
On Friday, President Trump announced his choice for the next Chairman of the Federal Reserve Bank. Kevin Warsh is a former regional Governor of the Bank and is well-known as a monetary “hawk” – he believes in using interest rates to control the rate of inflation, and has publicly worried that inflation erodes incomes, wealth, and the value of the US$. For this reason, he was a surprising choice, since Trump has often expressed his eagerness for lower interest rates.
As news of the announcement rippled through financial markets, alternatives to the dollar took a huge beating. Silver, which had been riding the crest of a speculative wave, fell a shocking 25% on the day, and at one point was down more than 30%, its worst day in 45 years. Gold, which has also been on a speculative roll fell over $600/oz. and closed down more than 8%. Bitcoin, the oldest, largest and most recognized of the many cryptocurrencies, is now down $46,000 or about 37% from its peak in October.
Clearly, or at least for now, market participants are no longer as worried that the Trump administration will let the US$ depreciate indefinitely against world currencies and alternatives. This is good news for Canada, as we have seen our dollar go up about 8% in the last year, making our exports more expensive, and not incidentally, making the value of our US stocks lower when measured in Canadian dollars.
There are good reasons why Trump would like interest rates to be lower, and why many consumers tend to agree with him. Lower interest rates make mortgages easier to carry, make car loans less onerous, and might even lead to lower interest rates on credit cards. (Trump’s demand to lower interest rates on credit cards to 10% seems to have disappeared without a trace.) Even more important for governments, low interest rates make the burden of carrying the public debt lighter. Currently the U.S. has public debt of $38.5 trillion. A drop of 2% in the interest the government must pay the holders of that debt would save the U.S. government almost $800 billion per year, equal to about $3,000 for every American household.
However, there is an important and very significant downside to lower interest rates, and it is best illustrated by the feedback loop that leads to higher housing prices. As the diagram below shows, low interest rates increase demand for housing, since mortgages become more affordable. The increased demand results in higher housing prices, which are financed by cheap loans. The boom in housing sales brings in unqualified purchasers who ultimately cannot carry the cost of their new homes. This eventually results in a gigantic bust, as was seen in the Great Financial Crisis of 2008, which posed the greatest threat to the world economy since World War II. What is true for housing is also true for other consumer goods, and of course, for government spending. Cheap money leads to excess spending, and eventually, the music stops and people need to be paid.
We do not know what the Federal Reserve Bank will do in the years ahead under its new Chairman, but all of us should hope that the mandate to keep inflation low is honoured. The instability that arises from rampant inflation is very damaging and contributes to the speculative distortions we have seen in financial markets in the past year. Low interest rates are the crack cocaine of finance, leading to a sudden and intense high, followed by a disastrous crash. We, and all sensible commentators, favour stability.
Media Appearances
Barry Schwartz on BNN Bloomberg’s Market Call – January 19, 2026
Podcasts
Venezuela + Financials outlook – January 14, 2026
Fed turmoil and credit card rate cap – January 23, 2026
Chips and streaming – January 27, 2026