Can economy handle "normal" interest rates?

|By:, SA News Editor

The die may already be cast for a hike in the Fed Funds rate next year, but overlooked in the recent Fed news, writes Jon Hilsenrath, is the FOMC's expectation of a 5.4% jobless rate in 2016, but a Fed Funds rate of just over 2%. This is far below the 4% the Fed considers appropriate for an economy hitting on all cylinders, so what gives?

"The economy can't bear a level of interest rates that looked normal in the past because it has been so deeply scarred by the financial crisis," writes Hilsenrath, shortening the explanation offered by Yellen at her press conference. There is precedent here, and that's the 1940s when the Fed kept rates extraordinarily low as the economy recovered from the Great Depression (though WWII kind of muddles things).

Back to being a hawk, St. Louis Fed chief Jim Bullard isn't thrilled with this sort of thinking and hopes and expects the Fed Funds rate to be near 4% by the end of 2016. "Ultimately, I think the committee will do the right thing," he said on Friday.

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