The president believes that the lowering of interest rates by the central bank will prompt businesses to increase production and investment, which will spur stronger economic growth. Lower interest rates, according to such thinking, strengthen consumer spending, which is popularly considered to be the key driver of economic growth. Given such faulty reasoning, it is not surprising that the US President has expressed outrage at some of the Fed's policymakers' refusal to lower interest rates. But does this make any sense?

This position implies that interest rates are determined by the Fed. Now, if this is the case, then the US president's criticism of the central bank should be seen as valid. After all, by lowering interest rates, the Fed can lay the foundation for a stronger economy. However, the Fed does not determine interest rates, the Fed only distorts interest rates by tampering with financial markets.

Individuals Time Preferences and the Interest Rate

According to thinkers such as Carl Menger and Ludwig von Mises, interest is the outcome of the fact that individuals assign a greater importance to present goods versus identical future goods. 

Life in the future is obviously not possible without sustaining it first in the present. According to Carl Menger:

To the extent that the maintenance of our lives depends on the satisfaction of our needs, guaranteeing the satisfaction of earlier needs must necessarily precede attention to later ones. And even where not our lives but merely our continuing well-being (above all our health) is dependent on command of a quantity of goods, the attainment of well-being in a nearer period is, as a rule, a prerequisite of wellbeing in a later period.

Also, according to Mises,

He who wants to live to see the later day, must first of all care for the preservation of his life in the intermediate period. Survival and appeasement of vital needs are thus requirements for the satisfaction of any wants in the remoter future.

Hence, various goods are required to sustain individuals' in the present before considering goods in the future. Therefore, there is a premium for present goods over identical future goods, which is what interest is all about. Consequently, this means that interest must necessarily be positive.

Consider a case where an individual has just enough to keep himself alive. This individual is unlikely to lend or invest his paltry means. The cost of lending or investing to him will be very high. However, once saving expands, the cost of lending or investing begins to diminish. Allocating some of his goods or money towards lending and investment now becomes possible, thus lowering the interest rate. From this we can infer, all other things being equal, that the expansion of private savings will result in a natural lowering of the premium of present goods versus future goods, i.e., to the decline in the interest rate.