Fed interest rate target for the next few years?

[ThisDinosaur]

The Fed attempts to keep interest rates in line with the "natural" rate of interest. Basically, they are trying to match the money supply with the population and the supply of raw materials used to make stuff for that population. You've got a population that is either growing, shrinking, or static, and you've got natural resources which are either becoming more or less abundant at any given time. In order for the population to trade goods efficiently, there is an optimal amount of currency to have in circulation.

To do that job well, the banks have to forecast. Forecasts are frequently wrong, but you never really know by what magnitude and direction. One of the more reliable predictors of future interest rates is current long term rates. That's not to say its a perfect tool, but the securities market does represent the thoughts of billions of investors all putting their own money where their mouth is.

[Mister Imperceptible]

But what if the natural rate of interest/inflation were higher than the low numbers being reported? Negative real interest rates, on purpose. I don’t think the Fed is benevolent or truthful. You’re either forced to buy overpriced assets susceptible to a big price deflation or sit in Treasuries/bank deposits giving negative real returns.

If you’re a higher earner like Augustus and you want to buy rental real estate, maybe you just wait until you have enough to pay cash. Add an inflow without introducing any new outflows.

Of course if you’re looking to buy in a place like California that may not be so practical. Or if you don’t earn so much to make such capital intensive investments.

Negative real rates and asset inflation makes for a lot of hard choices.

[jacob]

The long term (30yr) bond rate comprises a good ceiling (more like a downward policy/market force; not completely irresistable) for the near term. The bond market is vastly bigger and smarter (at least mathematically and in terms of long term thinking) than the equity-market. This is why an inverted yield curve is believed to forebode a recession.

That's probably a "signal" that the Fed doesn't wanna send.

Also, US government debt/GDP is nearing 100% (been a while since I looked it up) which means we're at the point where it's mathematically impossible to grow our way out of it anymore because the interest costs x debt > growth gains x gdp. Those interest costs are all financed by short term bonds these days.. because it's cheaper as long as the yield curve isn't inverted. That constructs additional ceiling---stretching along the entire curve.

[IlliniDave]

I don't even know if the Fed has targets for interest rates directly. They do try to dial in inflation to 2% or so, which probably would have some effect on interest rates. I would be surprised to see 10-year T-notes get above 4% or so in the near-term, but that is purely a guess. In the spirit of what jacob said above, the gov't probably does not want its borrowing costs to get too high.

[Farm_or]

The only response that the federal reserve has to preventing another financial collapse like the 1930s, is monetary policy. The "bullets" in their "six shooter" is interest rates control - effectively controlling the availability of money.

Higher rates equates to less available money and that resists inflation. Lower rates increases spending and is usually inflationary. That was puzzling recently, because we've had an unprecedented long tee of quanitive easing (low rates), without the corresponding increase of inflation.

That situation was unnerving for the fed because they done shot all six bullets. The concern going on now is reloading the revolver so they can do something to improve the next downturn. The balancing act is to reload without contributing to the economic downturn that your purpose is to oppose.

When you listen to an analyst say that "increasing interest rates is inflationary" they have it upside down. Yes, it raises the overall cost of an acquisition, but that is the intent. It's meant to shorten the supply of money to cause more discretion in spending in order to prevent run up on prices that cause inflation.

[Mister Imperceptible]

When did the real estate market bottom out last time? 2012? Even tho real estate is still largely correlated with the stock market it would appear there is a lag effect because housing is illiquid.

If it’s as you say and the two recent rate hikes caused drops like that, then keep saving cash for awhile because rates do look like they are going up, if only because the Fed has to maintain a foolish consistency. Housing prices in super-expensive-land should be further impacted.

[Mister Imperceptible]

That’s absolutely the case. I don’t think now is when you want to buy. The question is whether rising rates help to cause a plateau or a crash. I think in either instance you can afford to be patient.