> But only in the short term, since lenders will catch on and increase their interest rates to offset the inflation.

No, because lowering interest rates by 0.5% generally doesn't cause inflation to increase by 0.5%.

Moreover, most of the inflation from lower interest rates happens immediately. If you lower interest rates people borrow more money which causes some inflation, but to cause even more inflation people would need to borrow even more money, which they wouldn't do unless you lowered interest rates even further.

The level of outstanding debt (i.e. the money supply) goes up and then stays there until interest rates go back down and give people incentive to pay it back.

> As you said, you're transferring wealth from lenders to borrowers, which means a larger incentive will be needed to induce anyone (other than the Fed) to lend money.

Banks can borrow money from the Fed and lend it to other people. Also, when you lower interest rates it lowers the returns on everything else because people borrow money and use it to bid up securities, and then the now-smaller returns from issuing loans remain relatively attractive.

Notice that the US has had near-zero interest rates for over a decade and there isn't anything even resembling hyperinflation. But there is a whole lot more outstanding debt than there was when interest rates were higher.

> Giving them more money doesn't increase the amount of material or labor available

Sure it does, in the sense that available means in productive use rather than merely having physical existence.

If you pay people more they'll spend more time working and less time watching TV. They'll dig minerals out of the ground to make stuff with instead of leaving them in the ground. There is a difference between having something and doing something with it.

> It only works out to a net benefit under the assumption that you know how those goods should be put to work better than the people directly involved—despite apparently being unable to persuade people that your plan is better rather than resorting to underhanded tricks.

The entire premise of lending money is based on this being true. It's the assumption that some people have good ideas but not capital to fund them.

There are plenty of ideas that you can expect to turn $100,000 this year into $105,000 next year. If interest rates are at 4% they're viable, if they're at 6% they're not. Lowering interest rates makes more of those things viable.

It's not a matter of persuasiveness, it's a matter of transaction costs. Alice wants to start a company. She could borrow money and use it to pay salaries -- which is only possible if she can borrow at a sufficiently low interest rate. Or she could pursuade the workers to work all this year and not get paid until next year (when they'll get paid with interest). But then the workers would have to convince their landlords to let them live in their apartments without paying rent for a year, and the landlords would have to convince the government to let them defer paying property tax for a year, and the government would have to persuade the teachers to teach without pay for a year and so on.

Obviously borrowing the money from a bank is a lot more realistic.