What Should Be the Interest Rate?

Investment Analysis Clubs Macro Economic Trends and Risks
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As a result of recency bias, where we assume the recent past is a permanent state of affairs, many believe near-zero interest rates are “normal.” They aren’t. As the chart of 10-year US Treasury yields–a proxy for interest rates throughout the economy–illustrates, rates in the 3% or lower were an anomaly that only occurred in the relatively brief period of 2011-2022.

For the five decades between 1960 and 2007, interest rates of 4% and higher were the norm. These included the glorious decades of stable growth and rising stocks / housing valuations–the 1960s, 1980s, 1990s and up to 2007, just before the financial crisis of 2008-09.

For 33 of those years, interest rates of 5.75% or higher were the norm , from 1967 to 2000. No one said that the economy would collapse if interest rates didn’t drop to 3%, for it was understood that super-low interest rates would ignite inflation and incentivize destructive speculative excesses.

For the 25 years between 1970 and 1994, rates between 5.75% and 8% were normal.

March 19, 2025: The FOMC has voted to leave the
target range for the fed funds rate at 4.25% - 4.50%.

The above interest rate seems to be normal & at a proper level. I cannot see the argument for further cutting. Likely interest rates will go up if inflation returns.
The US stock market & US real estate market are pricey. Neither IMO needs to be juiced.

What say ye?

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Question is, “What interest rate would most benefit the country?”

With a large and growing US National Debt that needs to be continually refinanced, we want to keep interest rates as close to zero as possible.

The Fed has the tools to do that, as we saw in the aftermath of the 2008 financial crisis.

intercst

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Well zero means the stock market & real estate pricing can grow to the sky right. No it just prices housing & stocks out range of the middle class.

Maybe the question is what debt level most benefits the country? Certainly not at this level but both parties ignore the national debt except to utilize it as a club to criticize whatever party has control of the White House.

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Exactly.

Continual fiscal mismanagement is number one on the list of de facto agreements based on who really owns Congress and our politics. Anyone want to list a few more?

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The real question is whether the bond market will be allowed to operate freely as it did before 2000 or whether the Federal Reserve will manipulate the long-term Treasury yields along with the fed funds rate (which is an overnight short-term interest rate).

The issue isn’t the nominal market yield but the yield over the inflation rate. I have spent many hours studying the 10 year Treasury yield and real yield and also read books by Fed Chair Ben Bernanke and others about Fed history.

Before Fed Chair Alan Greenspan’s aggressive moves to cut interest rates after the 2001 recession (which led to the Great Financial Crisis) the real yield of the 10 year Treasury was above 2.5% (over the inflation rate). The Fed held the fed funds rate low long after the 2001 recession ended. Much longer than they should have.

After the Great Financial Crisis in 2008 the Fed manipulated the bond market and held the real yield to < 1%. Sometimes the real yield was negative.

Today’s real yield of the 10 year Treasury is too low. By artificially suppressing the long-term Treasury yield with outrageously large purchases using fiat money the Fed has inflated all asset markets, including stocks, bonds and real estate. This is a distortion of the economy and asset markets which was never part of the Fed’s mandate.

Today’s fed funds rate is too low. It’s <2% over the inflation rate. The Fed should not have cut in 2024. They should not cut now.

The interest rate of the 10 year Treasury is also too low. The Fed should continue to allow its bloated book of bonds to roll off and allow the market to set the most important price in capitalism: the price of money itself.

@tjscott0 I agree with you. Not only don’t the asset markets need to be juiced. They are in bubbles which are artificial and should be deflated. The high prices of housing, especially, are out of reach of many people because of this artificial inflation.

This is not only my opinion. It’s also the opinion of the Editorial Board of the Wall Street Journal which has written about this several times.

For those who say that bond rates should be artificially set to benefit the government – that’s communism. Massive market distortions lead to all kinds of malinvestment and eventually hyperinflation.

The bond market should allow the so-called “bond vigilantes” to control the yield of all bonds, including Treasuries, without being trumped by the Fed’s bureaucrats.
Wendy

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Dear Intercst,

We will get the opposite of what is good for business and the economy. The proposed tax cuts are adding a lot of risk.

That is not true, 2022 saw major industrial investments by the federal government. The debt to real GDP ratio needs to come down. The corporate tax rate needs to rise.

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The tax cuts are paid for. TIG implied it himself: Prole spawn will only have “3 dolls, instead of 30”, because the money for the other 27 was given to the “JCs”.

Steve

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Dear Steve,

How many golden geese did we start out with?

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There is far too much loose money floating around. The stock market is clearly overpriced. Real estate has rocketed up, again for no apparent reason. There is no reason homes should be selling for 50%-100% more than they were just 5-6 years ago.

Asset inflation is all over the place; Sotheby’s finally had an off year last year when things got beyond ridiculous.

Interest rates are on a knife’s edge right now; higher and we’ll have recession (which is likely anyway) and lower we’ll just pump more air into the balloon. I vote for “leave it alone for a while.”

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