But the interest rates can stay low indefinitely; the Fed is determined to keep it that way because of how many people depend on home value. Even moving short-term rates to 0.25% is met with shock.
As far as I understand, the Fed only has limited control over the interest rates if they want to maintain a functioning economy.
For example, if inflation starts picking up, rates will have to come up to tamper it. Otherwise you get runaway inflation.
If inflation increases in other countries, then the US rate will follow, otherwise our dollar will take a huge hit due to the interest rate/exchange relationship.
> the Fed is determined to keep it that way because of how many people depend on home value.
No, the main two things that the Fed manages with monetary policy (and they tend to be balanced against each other) are inflation and employment. Low rates are used to spur employment at the cost of risking inflation, high rates are used to constrain inflation at the risk of harming employment.
I know what the textbook says; I'm talking about the political realities of pursuing a policy that would cause a precipitous value in people's homes.
True, the Fed is nominally Independent, and Immune to Political Influences, not in practice it's not. The bankers that contribute to its policies also have to worry about mortgages going underwater from a return to historically normal rates.
> I know what the textbook says; I'm talking about the political realities of pursuing a policy that would cause a precipitous value in people's homes.
The political reality is that the Fed has fairly consistently -- and reasonably predictably by experts looking at the same signals that the Fed overtly claims to watch -- made rate decisions as one would expect considering the combination of employment-related and inflation-related considerations they consider under the "textbook" case. So, conspiracy theories about home prices are unnecessary.
> True, the Fed is nominally Independent, and Immune to Political Influences, not in practice it's not.
I won't argue that the Fed is someone subject to political influences, OTOH, those strongly militate both for working to promote employment and working to constrain inflation, which are also the Feds overt mandates.
> The bankers that contribute to its policies also have to worry about mortgages going underwater from a return to historically normal rates.
After the 2009 crisis, the wave of defaults that occurred then, and the tighter lending policies that banks have taken since, there's not a huge risk there.
The last time unemployment was this low [1], the Fed had rates near 5%, and yet raising them to 0.25% is considered shocking, even with inflation very low -- almost nothing over 2015 [2]. How would you explain the reticence?
> The last time unemployment was this low, the Fed had rates near 5%
Well, leaving aside looking at current rates rather than leading indicators (since, while problematic, its a lot more convenient), the time you were referencing with a ~5% Fed funds rate also had inflation rates near 5%, not hovering around 1% (like now) after more than a year of being substantially below 1%.
> and yet raising them to 0.25% is considered shocking, even with inflation very low
The Fed raises rates to control inflation. With low inflation, you expect low rates. It also lowers rates to improve employment, but with virtually no inflation, there's little reason for tightening the money supply.
The last time inflation was this low this long -- in the mid 1950s -- the effective Fed Funds rate was also quite low, though a bit higher than now (around 1%, rather than 0.37% now).
>The last time inflation was this low this long -- in the mid 1950s -- the effective Fed Funds rate was also quite low, though a bit higher than now (around 1%, rather than 0.37% now).
So then you agree that returning to historic real rates would require the Fed to do something currently unthinkable -- ~1% rather than 0.25%?
Edit: Also consider what a shift of 0.75% does on the implied price of a house when mortgage rates are at 3.75%:
For example, if inflation starts picking up, rates will have to come up to tamper it. Otherwise you get runaway inflation.
If inflation increases in other countries, then the US rate will follow, otherwise our dollar will take a huge hit due to the interest rate/exchange relationship.