Mish, I always read you bashing the Fed, particularly lately, with the criticism that they will "cave", lower interest rates, and feed yet another bubble (at least that's what I think you are saying!). So, being an amateur economist (Economics Degree, but, worked in oil exploration for 30 years!), I have a question. If long term interest rates, set by the market, remain low, reflecting the balance of supply and demand for money at those maturities, what is the Fed supposed to do? Should they continue to raise interest rates, slowly but surely to +/- 5 percent, because that is the historical norm, and that will give them enough room to lower interest rates in the future? To me, the fact that long term interest rates are, and have been, low is due, once again to the supply and demand for money, and shows that the "market" thinks that future inflation is going to be very low going forward as efficiency gains reduce the costs of.... everything!

If the fed simply tries to keep raising rates because "that's what they should be in a normal economy", then, without a doubt, they will just induce a recession, thus "popping the bubble", and bring a load of misery to the overall economy.

My amateur self, always thought that they should raise, but, very, very slowly, as conditions permitted, allowing the economy to run, but, keeping their short term rates in line with the longer term "free market" rates, maybe at a pace of 1/4 point to 1/2 point a year going back to when they first started raising.

Would love to hear you expand on your thoughts regarding this subject.


Comments (3)
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The free market should be setting interest rates only. The original intent of the fed was to provide liquidity in times of economic crises. All the other mandates need to go. These were later added and have done nothing but distort free market capitalism. We now have crony capitalism. How can arrogant ivory tower PhD's who have never worked a day in the business world run the worlds largest economy. Interest rates set by the fed are basically a Phd standard, how ridiculous. Furthermore the inflation numbers used by the fed to determine interest rates are DELIBERATELY understated to justify continued largess by the govt so they can continue to deficit spend without going bankrupt by having to pay true interest rates on their largess borrowing.


You had me for a while HMK, but, I don't agree that inflation is understated. From what I purchase, it is Overstated. The price of a gallon of milk or gas is the same as it was 20 years ago. I live in Texas and real estate has gone up about 3 percent a year in my area, which, is good and bad I guess. But, things like computers, TV's, appliances, are all cheaper today than they were 20 years ago. The only things I see really going up are the costs to go to doctors and hospitals (or at least the cost of insurance to cover those things), and the cost of a college education! But, most things that I purchase on a daily basis have either gotten cheaper or stayed steady over the years.

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