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The low interest rate century

Summary:
During the Great Recession, I argued that low interest rates were the new normal and that during the 21st century people would be constantly complaining about “bubbles”. But even I never envisioned rates being this low. Ten-year bond yields are still 20 basis points above the 2016 lows, while 30-year bond yields have been hitting all-time record lows. Why the difference? In my view, the 10-year yield is a bit more influenced by cyclical factors, and the economy was a bit weaker in 2016 than it is today. In contrast, the sharp fall in the 30-year bond yield reflects the market gradually realizing that low rates are not just a passing fad, but rather are the new normal. I thought we’d cycle between 0% and 3% over the business cycle, now it looks more like a 0% to 2% cycle

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During the Great Recession, I argued that low interest rates were the new normal and that during the 21st century people would be constantly complaining about “bubbles”. But even I never envisioned rates being this low.

Ten-year bond yields are still 20 basis points above the 2016 lows, while 30-year bond yields have been hitting all-time record lows. Why the difference?

In my view, the 10-year yield is a bit more influenced by cyclical factors, and the economy was a bit weaker in 2016 than it is today. In contrast, the sharp fall in the 30-year bond yield reflects the market gradually realizing that low rates are not just a passing fad, but rather are the new normal.

I thought we’d cycle between 0% and 3% over the business cycle, now it looks more like a 0% to 2% cycle might be the new normal. This cannot be explained by inflation, which isn’t much different from what it was in the late 1990s.

The low interest rate century


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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