Final answer:
The bias towards holding interest rates too low rather than too high is driven by the desire to stimulate economic growth while avoiding excessive inflation and asset bubbles. Lower interest rates can encourage consumer spending and business investment, boosting economic activity. However, keeping rates too low for an extended period can lead to inflation and other risks. Central banks aim to strike a balance by monitoring economic indicators and implementing appropriate monetary policies.
Step-by-step explanation:
Interest rates are usually set by central banks as a tool for managing the economy. The general bias towards holding interest rates too low instead of too high can be explained by the desire to stimulate economic growth and avoid recession. When interest rates are low, borrowing costs are reduced, encouraging consumer spending and business investment, which can boost economic activity. However, keeping interest rates too low for an extended period can also lead to inflation and asset bubbles.
For example, after the 2008 financial crisis, the U.S. Federal Reserve implemented unconventional policies like quantitative easing to lower interest rates and stimulate the economy. The increase in bank reserves through quantitative easing contributed to economic recovery, but there were concerns about inflation. To prevent a potential boom and maintain price stability, central banks closely monitor inflation and adjust interest rates accordingly.
Therefore, the bias towards holding interest rates too low is based on the goal of fostering economic growth while avoiding excessive inflation and asset bubbles. It is a delicate balance that central banks strive to achieve by carefully evaluating economic indicators and implementing appropriate monetary policies.