Wikinvest Wire

Ideal U.S. interest rate is minus 5 percent?

Monday, April 27, 2009

The more you look at monetary policy both in the U.S. and around the world, the more you get the feeling that we're having a "Tacoma Narrows Bridge moment" where strong winds have been blowing for decades and the fundamentally flawed underlying design of the system is causing ever more severe oscillations.

From the Financial Times comes this report on a new Fed study about interest rates.

The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve’s last policy meeting.

The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation.

A central bank cannot cut interest rates below zero. However, the staff research suggests the Fed should maintain unconventional policies that provide stimulus roughly equivalent to an interest rate of minus 5 per cent.
A growing number of observers are of the opinion that everything that central banks have been doing for the last twenty years has been unconventional, but that won't stop them from continuing down the current path.

There's another Fed meeting this week and, given the recent surge in bond yields, don't be surprised if we get another QE announcement ("quantitative easing") to push up prices for Treasuries once again.

The very thought of what might happen to all those "green shoots" and "glimmers of hope" in our nascent economic recovery if 30-year mortgage rates were to soar past five percent again (an idea that would have sounded preposterous just a few years ago) is almost too painful to contemplate.

Here's how things worked out for "Galloping Gertie" in Washington, back in 1940.

Skip right to about the three minute mark to see how it ends up.


Evan said...

The question is, are we going to fire the civil engineers that built the current US economy (The Fed) and hire competent ones to rebuild it? It occurs to me that the purpose of inflation is to be able to still make money even when you have debt (banks do this). With zero inflation, a negative net worth is very bad. With positive inflation, your debt becomes worth less. So anybody with a negative net worth (the Government, banks, anybody doing 'leveraging') wants inflation. Deflation isn't bad, unless you have debt. Period. It only becomes bad when 'everybody' has debt and 'society will come crashing down' like the Tacoma Narrows Bridge. Just remember that anybody not on the bridge didn't get hurt. Now you can go ahead and tell me I'm wrong.

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