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This is a very naive viewpoint IMO. The fed doesn't just pick the rates they want. The fed definitely does not "want" rate at rock bottom where they are now in
by anm89 5y ago
This is a very naive viewpoint IMO. The fed doesn't just pick the rates they want. The fed definitely does not "want" rate at rock bottom where they are now in a perfect world.
The market dictates to the fed the range of rates which are feasible and the the fed chooses from within that range. They don't know exactly what the allowable range is and if they get it wrong the markets react strongly.
And the record is very clear on this point. For example the Powell pivot when Powell told everyone that he was going to taper and the market told him that that was off the table. He quickly conceded.
- imtringued 5y agoThe rates depend on saving/spending preference. There is a "market rate" where the interest rate hits the equilibrium and therefore savings = investments becomes balanced again. Too far away in either direction will upset the savings = investments identity. Turkey is a good example. However, an aging population in the US is stacking the cards in favor saving preference. When rates hit 0% you basically hit the "limit". The last dollar that can be saved has been saved. From this point on more savings just dilute the pool of existing savings. You then get banks that sell AAA rated CDOs filled with subprime mortgages. It's because that's what the market wants. Old people want zero risk savings/investments and when you tell them that is impossible they will keep believing the lies instead.
- anm89 5y agoThe rates don't depend on a single thing. They depend on literally everything. I said the market "dictates" the rates to the fed, not that it sets them. The markets are just an information conveyance mechanism. Also again, we can very clearly empirically say that there is not a 0% floor on rates.