Dollars and Jens
Tuesday, September 21, 2004
interest rates
Some thoughts on low interest rates.
- The 10 year bond is now around 4.1%. Projections for nominal growth over the next decade are 5.2% per year. Money collected in taxes now would be a larger portion of the economy than would be required to pay off debt ten years from now, provided those projections are anywhere near accurate. Good reason to be less concerned about a deficit of 3.5% of GDP; that deficit is an uncharacteristically rational response on the part of the government to low interest rates.
- Perhaps instead of setting a target for the federal funds rate, the FOMC should target the difference between it and the 10-year yield. (This would be fundamentally different from such things as price rules; the FOMC would not need to be shy about changing this target every 6 weeks, or between meetings as may be necessary.) In any case, it seems hard to think they need to hurry short rates higher when the ten-year yield is so low.
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