Why do interest rates matter if the government can create money?

Interest rates matter because they affect economic behavior, even though they don't constrain the government's ability to spend.

For the private sector, interest rates influence borrowing decisions. Lower rates make mortgages, car loans, and business investment cheaper, potentially stimulating spending. Higher rates make borrowing more expensive, potentially slowing spending. This is why the Federal Reserve adjusts rates to try to manage inflation and employment.

For the government, interest rates affect the composition of spending but not the ability to spend. Higher rates mean larger interest payments on the national debt - money that flows to bondholders. Some argue this is regressive (transferring money to those who own bonds). Others note that interest payments add to the deficit and stimulate the economy.

MMT economists generally favor keeping interest rates low and using fiscal policy (government spending and taxation) rather than monetary policy (interest rate adjustments) as the primary tool for managing the economy. This is because fiscal policy can be targeted to specific needs, while interest rates are a blunt instrument that affects everyone.

Some MMT proponents, like Warren Mosler, have argued for setting interest rates at zero permanently and using other tools to manage the economy. This remains a matter of debate within MMT circles, but all agree that interest payments are not a reason the government 'can't afford' to spend - they're just another form of spending.