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Originally Posted by Tiny
Do you think the Fed and other central banks would be unlikely to throw a wrench in this, say by keeping interest rates too low for too long?
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That surely must be the most topical question asked by those in the world of finance today, along with the issue of whether the Fed is likely to maintain its "tapering" quasi-plan by reducing purchases at a $15 billion/month rate. Of course, they always say the tapering schedule will be "conditions-based," and reserve the right to reverse case should deteriorating conditions warrant.
In recent years, the Fed has always seemed extremely reluctant to raise interest rates unless almost forced. Consider what happened in 2019. About two years earlier, the Fed started taking baby steps to raise the Fed funds target rate, and walked it up to the 2.25-2.5% range by early 2019. A little before midyear 2019 it was clear that the economy was decelerating again, so they began a reversal by cutting substantially in several increments. If the economy wasn't at that time strong enough to withstand an approximately 2.4% effective funds rate and the roughly 3.2% 10-year rate (2018 peak), and it clearly wasn't, it surely isn't now with a shakier, much more uncertain outlook and about 5 million fewer jobs than at the pre-pandemic peak.
Quote:
Originally Posted by Tiny
You pointed out somewhere else that, despite higher inflation, 10 year U.S. bonds yield around 1.5%, and 30 year yields are under 2%.
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On Friday, the 10-year UST closed at a yield of 1.45% and the 30-year closed at 1.87%. That seems totally nuts! What rational individual would buy such an asset?
Not many do, but institutions in the US and around the world must hold these US dollar-denominated bonds along with other dollar-denominated assets.
If significant inflation of a sustained nature can't be controlled by the Fed and the rest of the world's central banks, institutions all around the globe would take a huge balance sheet hit. So the Fed, and policymakers around the world, are more or less forced to keep the entirety of the yield curve pancaked, lest some "black swan" event occur somewhere. The entire world's interconnected financial system is frighteningly shaky, and the economy is more overstimulated and heavily medicated than at any time in history.
And people generally don't have any idea that a black swan is on the way until it smashes bloodily through the windshield.
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to point-out the hypocrisy of others