Interest rates will be low for a long time

I don’t know by what mechanism expectations are set. Conditioned on this mysterious process connecting Fed policy and the public’s expectations, people should know the Fed plans to keep interest rates low for a long time. This probably means they will be low even after recovery starts and that definitely means there will be inflation.

Got that you public? There will be inflation, damn you! Hey you over there socking cash under the mattress: cash will be worth less in the future and your better off investing it. Seriously. The Fed is dead set about making that cash worth less!

Now, credibility sets in, bringing about recovery. I’m holding my breath.

(PS – Prof. Sumner, Fed GDP forecasts are nominal targets. Forecasting is the only credible way to create targets.)

UPDATE 5am – Ooops… See how easy it is to condense all types of monetary policy into “interest rates”!

5 thoughts on “Interest rates will be low for a long time”

  1. (rhetorical question) Investing it in what?

    (anecdote) I invested some cash in some well-rated mutual funds last year, focusing on fields I thought would grow at a conservative rate: health care, natural resources, energy. I put a little into some riskier funds: Asian markets, technology. I’m down about 50% overall, with every fund showing significant declines. The cash I kept in my pocket has only declined at the rate of inflation.

    I elected not to “bargain hunt” when the DJIA first dipped below 9,000. I’m watching three friends struggle with large mortgages on houses they bought just before the real estate crash. It seems the only winning move is not to play. (probably not true but you can’t blame people like me for being a little nervous)

  2. You thought stocks were a good deal when you bought them at twice the price. Now they’re cheaper and they’re not a good deal? What changed?

    The interesting comparison isn’t between the cash you held in your pocket last year vs. your stock portfolio last year. The interesting comparison is the difference in expected returns over the next year.

  3. The trajectory changed. I thought growing stocks and funds were a good deal at twice the price, and I bought in with visions of ~5% growth. Of course, they aren’t real losses unless I sell. Or if the holdings go bankrupt. I’m mostly worried about the latter.

    On the other hand, property probably isn’t a bad buy right now…

  4. Stocks, collectively. A stock can still dwindle to nothing or disappear entirely. The best strategy I can guess at right now is a broad, shallow portfolio.

    Property is slightly more attractive to me right now because it’s less likely to up and walk away. If my vacant plot of land loses half its value, I’ve still got a vacant plot of land. Not so with my hypothetical Circuit City stock.

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