Can economy handle "normal" interest rates?

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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Comments (15)
  • Captain Pike
    , contributor
    Comments (890) | Send Message
    Bullard sounds like a Dullard.


    Interest rates are the tool for keeping the inflation jeannie in the bottle. There is no appreciable inflation now or on the horizon because of the plentiful energy situation and the structural changes in the employment market. (Energy spikes and full employment the only drivers for inflation over the last 45 years)


    Raising rates for the sake of raising rates would only kill economic activity needed to get things rolling NOT TO MENTION balloon the fed budget deficits. All the fed has to do is keep their eye on enforcing the mortgage market, ie, making sure documentation is done right and substantial down payments required. That would prevent any housing bubble.


    If and when a responsible adult takes residence at 1600 penn ave and the fed budget is reigned in, along with steady real 4% growth, should the fed get interested in raising rates.
    24 Mar 2014, 09:19 AM Reply Like
  • fred1724
    , contributor
    Comments (67) | Send Message
    YHave you been to the supermarket over the last two years?
    24 Mar 2014, 09:49 AM Reply Like
  • Captain Pike
    , contributor
    Comments (890) | Send Message
    Yes Fred, many times a week. I can still buy russet potatoes @ .35c/lb at Aldi, Pork @2.99 lb at Wally and on and on. Prices went up in 08/09/10 when oil had spiked but not since.


    If you choose to buy a full cart at Whole Foods, that's your fault.
    24 Mar 2014, 11:46 AM Reply Like
  • kata
    , contributor
    Comments (1534) | Send Message
    I like Whole Foods, veggies are mostly fresh and they have some brand of stuffed olives with sun dried tomatoes that is delish. But there are other markets near me that have just as good or better fresh fruits and veggies at about the same price that I just like better. And aside from Murrays poultry, which is also terrific, I still buy my meats from the Butcher. The prices are high, not doubt about it and probably due to the weather and the drought and world wide demand.


    But all that has nothing to do with the outrageous price increases in your local supermarket. Everything you buy has had its price double and its size cut in half from a couple of years ago. Now you have to buy two cans of tuna to make two sandwiches where you used to only have to buy one and two "pints" of ice cream because they are no longer a pint. The cans of juices, the 5.5 ounces of tomato sauce that used to be 7 ounces, the napkins that are now indeed paper thin, the shrunken rolls of paper towels, literally everything you buy has had huge price increases by shrinking its packaging and giving you less.


    Its no wonder the supermarket companies are doing great. Everyone has to buy two of everything to get the same amount they used to buy. So don't blame it on the usual definition of inflation which usually meant the cost of labor or the cost of the raw commodity somehow being passed through, no way. Commodity prices are actually falling, not rising, not enough demand, and labor costs have been stagnant, too much supply. Its been profit margins for Kroger and Safeway and other food companies that have been getting fatter and the consumers wallet getting slimmer.


    You want to call that Inflation? Then we have Inflation. But there is scant other pressure on core prices so if Costco and WalMart decide on a price war, that Inflation will dry up quickly and share will go to the discounters and prices will fall not rise.
    24 Mar 2014, 04:20 PM Reply Like
  • bbro
    , contributor
    Comments (11234) | Send Message
    Follow the deposits to loans ratio....
    24 Mar 2014, 10:01 AM Reply Like
  • scarkmott
    , contributor
    Comments (242) | Send Message
    Captain Pike - "Responsible adult" George W. Bush is available presently. Is he the type of person you had in mind?
    24 Mar 2014, 10:26 AM Reply Like
  • Captain Pike
    , contributor
    Comments (890) | Send Message
    @ scar --- NO!! and no other bush leaguers. George was really thought challenged and his only economic plan was "Stimulus Checks".LoL. And I will never be able to excuse him for disregarding the advice of General Shinseki, which allowed a quick victory to become a protracted, expensive grind that we finally won. He also blundered when he chose and then did not replace in 04 Cheney with someone electable in 08. Not to mention retaining Greenspan.


    The best candidate we have had in many decades was good ol Mitt, not perfect, but way better than anyone else on stage since the 60's.
    24 Mar 2014, 11:52 AM Reply Like
  • SoCalNative+(RIP)
    , contributor
    Comments (651) | Send Message
    C'mon Skar... GWB comment? The guy has been outta office for how long???
    24 Mar 2014, 11:55 AM Reply Like
  • wigit5
    , contributor
    Comments (4365) | Send Message
    SoCalNative, neither side ever really lets things go 50 years from now people will be blaming Bush probably...
    24 Mar 2014, 12:32 PM Reply Like
  • mobyss
    , contributor
    Comments (2634) | Send Message
    "C'mon Skar... GWB comment? The guy has been outta office for how long??? "


    If you like your "Blame Bush for Everything" cop-out, you can keep your "Blame Bush for Everything" cop out!
    24 Mar 2014, 07:22 PM Reply Like
  • notta lackey
    , contributor
    Comments (131) | Send Message
    Why not be bipartisan? Both parties can blame it on Martin Van Buren or the Whigs. Then we could cast permablame and neither party would need to take responsibility for anything, a politician's wet dream.
    25 Mar 2014, 10:39 AM Reply Like
  • rasanders22
    , contributor
    Comments (612) | Send Message
    Obamacare is Bush's fault. Didn't you get the memo? You can laugh at stimulus checks all you want, but why don't you go figure out what the average unemployment rate was under Bush and what it was under Obama, then come back to this thread.
    24 Mar 2014, 03:07 PM Reply Like
  • Captain Pike
    , contributor
    Comments (890) | Send Message
    Are you serious? It was nothing but a house flipping free money bonanza, where anyone who could fog a mirror got any loan they wanted and Wall st. packaged that toxic crap. The music stopped when Lehman went under and everyone was leveraged out. Then nothing but foreclosures. The US economy was a pyramid scheme.


    And the only thing that has prevented a continuing rapid descent into mayhem/rioting/anarchy has been the fortuitous Oil & Gas boom. If we still had to buy the amount of foreign oil we were buying in 08, inflation would be at Weimar levels.


    We are in a transition period that still needs some brains at the wheel to go right. We have not had those brains and we still don't. We have to transition to a modern energy economy, with electric cars and alternate fuel trucking, combined with RESHORING.


    Bush had nothing to do with the good times, but could have avoided the crash and Obama has nothing to do with this energy resurgence, but could be helping with infrastructure money for the electric charging/grid and tax advantages for trucking switch.
    24 Mar 2014, 05:45 PM Reply Like
  • kata
    , contributor
    Comments (1534) | Send Message
    It went as low as 3.9% and I was amazed.
    24 Mar 2014, 06:12 PM Reply Like
  • Guardian3981
    , contributor
    Comments (2535) | Send Message
    What will likely happen is taper will continue and fund rate will stay very low.


    I think we will see if and when taper is complete the markets will taper down with it.
    24 Mar 2014, 04:15 PM Reply Like
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