Markets

Low Rates Fail to Boost US Business Investment

By Markets Desk · 2026-09-13 · 2 min read

A wooden gavel resting on a polished mahogany desk — Illustration: Tradingbird

The Federal Reserve prepares to raise rates, but data shows a weak link between borrowing costs and corporate capital expenditure over the last 25 years.

The Federal Reserve Open Market Committee meets this week to discuss a potential rate hike. This would be the first increase in three years. President Trump favors lower rates to reduce the deficit. Most policymakers view lower rates as beneficial for growth. This consensus assumes a direct link between borrowing costs and investment.

GN markets/policy (en-US) notes that this conventional view is incomplete. Low rates have not consistently driven non-residential investment. Instead, they have fueled financialization. This shift redirects capital away from productive capacity. The result is a stagnation in real wage growth.

Investment Cycles Ignore Rate Signals

Neo-Keynesian theory suggests lower rates stimulate growth. Companies are expected to invest more when capital is cheap. Inflation then rises, prompting the Fed to raise rates. This cycle is designed to cool the economy. The theory relies on investment as the primary driver.

Data from the past 25 years contradicts this model. Non-residential investment shows little correlation with interest rates. Investment cycles are driven by other factors. These include technology, trade policy, and regulation. These elements are outside the Fed’s control.

Financialization Over Productive Growth

Firms remain unresponsive to short-term rate changes. The Fed’s policy significantly impacts asset prices. Low rates encourage debt accumulation and financial engineering. Inequality worsens as a result. Incentives steer the economy toward financial transactions. Real economic activity declines.

Chairman Kevin Warsh acknowledges this divergence. Short-term rates may be restrictive for some sectors. They are not restrictive for financial markets. The Fed should reassess its role. Monetary policy has increased financialization. This complicates the goal of maximum employment with stable prices.

Capital Stock Decline Drags Wages

Net domestic investment is the best measure of capital stock growth. This metric has declined as a share of GDP for decades. Real wage growth correlates with productivity growth. Productive workers can demand higher wages. Stagnant investment leads to stagnant wages. American Compass research highlights this trend.

Companies consume fixed capital faster than they replace it. They return cash to shareholders instead. This behavior is partly due to Fed policy. Since 2000, the Fed has maintained low policy rates. It has pushed nominal rates below inflation three times. This environment discourages long-term capital formation.

Based on reporting by commonplace.org, compiled by the Tradingbird desk.