[dragonwriter]

> 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.

[SilasX]

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.

[dragonwriter]

> 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.

[SilasX]

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?

[1] http://data.bls.gov/timeseries/LNS14000000

[2] http://inflationdata.com/Inflation/Inflation_Rate/Historical...

[dragonwriter]

> 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).

[SilasX]

>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%:

http://www.bankrate.com/finance/mortgages/current-interest-r...

[dragonwriter]

> So then you agree that returning to historic real rates would require the Fed to do something currently unthinkable -- ~1% rather than 0.25%?

No, for three reasons.

(1) A limited sample problem; the present circumstances are nearly historically unprecedented. When the only post-WWII comparable in inflation terms is in the mid-1950s (and, conveniently, its also very roughly comparable in at least headline unemployment terms, though other employment measures may not look similar), and that's deep in the Bretton Woods period which puts entirely different constraints on the effects of (and thus the calculus feeding in to) monetary policy, you've really got no good comparison in history.

(2) The current effective federal funds rates (what was around 1% in the 1950s period with similar inflation) is 0.37%, not 0.25% (The current target rate is 0.25%-0.50%, and the actual effective rate happens to be right in the center of that target range.)

(3) Prior to the recent jobs report, which showed gains at a slower rate than anticipated, most predictions were for a July increase in the target rate, possibly followed by another in September. After the recent jobs report, predictions are mixed, with an increase by September seeming commonly predicted, with some possibility of a July increase still on the table. Raising the target from its current level (which, again, isn't 0.25%, but 0.25%-0.50%) isn't "unthinkable", in fact, it seems to be what everyone is thinking.