Is There an Insanity Premium on Interest Rates?

Paul Krugman: “The Federal Reserve responded to the inflation spurt of 2021-22 by sharply raising interest rates. It kept rates high for a long time, even though inflation was already most of the way back to the Fed’s (arbitrary) target of 2 percent by late 2023. But the Fed finally began cutting rates this past September. So are you feeling any relief?”

“Probably not. The Fed only controls short-term rates — in fact its target, the Federal funds rate, is an overnight rate on loans between banks. Yet the interest rates that matter for peoples’ lives are longer-term: rates on 5-year car loans, 10-year corporate bonds, 15- or 30-year mortgages. And a funny thing has happened to those longer rates: they’ve gone up…”

“This divergence is unprecedented.”