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My understanding is that interest rates were cut originally in order to provide a "safe landing" instead of a "sharp drop" after the last economic crisis (and t

My understanding is that interest rates were cut originally in order to provide a "safe landing" instead of a "sharp drop" after the last economic crisis (and that they were left low since then). If interest rates are imposed externally by Central Banks instead of by a free market, how do we know what the natural rate would be? Do Central Banks attempt to adjust interest rates towards the natural rate or is it in some sense completely arbitrary/detached?

gridlockd 7y ago
The natural rate would be fluctuating due to time preference and expected risk, but even if the natural rate was low, it wouldn't be zero. That's absurd. Central banks attempt to adjust interest rates to keep inflation at a target rate, which is a balancing act between maintaining a stable currency and stimulating (or resuscitating) an economy.
H8crilA 7y ago
The article is talking mostly about long term interest rates (on 10, 20, 30 yr government bonds). Those are set by the market, by a simple demand/supply mechanism on individual bond issues. Things like QE have some impact, but the impact is hard to gauge. The central banks normally determine only the short term interest rates (up to 3-6 months). Note that even as QE is being slowly reversed in the United States and the short term interest rates have been raised - the 10yr, 20yr, 30yr treasury yields are still tanking like crazy. So it is not the fault of the central banks, which is the point of the article. In short - people are buying bonds which eventually drives the yield below zero. There's no rule that says "a bond can only be sold at below the levels that the 0% yield implies", therefore brace yourself for the possibility of breaching this level. For any currency, including USD.
- scottmsul 7y ago
  > The central banks normally determine only the short term interest rates (up to 3-6 months). But if the short-term rates are manually set by central banks to be artificially low, wouldn't that be the primary driver behind negative long-term interest rates even if the exact number is determined by supply and demand? The article is talking about natural drivers like "negative time preference" which just sounds wrong.
  - H8crilA 7y ago
    Well 10yr or 20yr should still be above zero even if short term rates are kept around zero for an extended period of time. This is due to the cost of locking money in for a long period of time. What the article is trying to say by "negative time preference" is that this sound logic: "I'm giving you money for 20 years instead of lending money 80 times for 3 months each time; pay me more for that privilege" is disappearing in the market.

gridlockd 7y ago

The natural rate would be fluctuating due to time preference and expected risk, but even if the natural rate was low, it wouldn't be zero. That's absurd. Central banks attempt to adjust interest rates to keep inflation at a target rate, which is a balancing act between maintaining a stable currency and stimulating (or resuscitating) an economy.

H8crilA 7y ago

The article is talking mostly about long term interest rates (on 10, 20, 30 yr government bonds). Those are set by the market, by a simple demand/supply mechanism on individual bond issues. Things like QE have some impact, but the impact is hard to gauge. The central banks normally determine only the short term interest rates (up to 3-6 months). Note that even as QE is being slowly reversed in the United States and the short term interest rates have been raised - the 10yr, 20yr, 30yr treasury yields are still tanking like crazy. So it is not the fault of the central banks, which is the point of the article. In short - people are buying bonds which eventually drives the yield below zero. There's no rule that says "a bond can only be sold at below the levels that the 0% yield implies", therefore brace yourself for the possibility of breaching this level. For any currency, including USD.

scottmsul 7y ago
> The central banks normally determine only the short term interest rates (up to 3-6 months). But if the short-term rates are manually set by central banks to be artificially low, wouldn't that be the primary driver behind negative long-term interest rates even if the exact number is determined by supply and demand? The article is talking about natural drivers like "negative time preference" which just sounds wrong.
- H8crilA 7y ago
  Well 10yr or 20yr should still be above zero even if short term rates are kept around zero for an extended period of time. This is due to the cost of locking money in for a long period of time. What the article is trying to say by "negative time preference" is that this sound logic: "I'm giving you money for 20 years instead of lending money 80 times for 3 months each time; pay me more for that privilege" is disappearing in the market.