Some food for thought in today's NYTimes.
Federal Reserve officials, who meet this week, are beginning to suspect that the perplexing decline in long-term interest rates is more than a temporary aberration.
The possibility has major implications for the economy, and it creates new puzzles for Fed officials on how they should respond.
On Thursday, the Fed is all but certain to raise the federal funds rate on overnight loans between banks by another quarter point, to 3.25 percent. That would be the ninth increase in the last year, and the central bank is expected to signal that it will continue to raise overnight rates at a "measured" pace.
But the real debate at the meeting is expected to be about the unexpected decline of long-term interest rates, which have kept mortgage rates at their lowest level in decades and fueled what many analysts fear is a bubble in housing prices.
One school of thought holds that low bond yields are a harbinger of slowing economic growth, which would reduce demand for credit in the future. Another school holds that global investors have lower inflation expectations than in the past, which reduces the risk of holding long-term bonds. If either theory is correct, the Federal Reserve would have less need to fend off inflation and could stop raising short-term rates at a much lower level than in the past - perhaps below 4 percent.
But yet another theory holds that long-term interest rates may have been depressed by other factors, including a "savings glut" around the world and efforts by Asian central banks to keep the value of their currencies down by buying United States Treasury securities.
If that is true, the flood of foreign money into the country could be diluting the Fed's effort to prevent inflation. That would imply that the Fed needs to raise rates more than many investors are expecting. ...