Interest rates have been on a secular decline over the course of the last century. Different economists have described this via various terms- "savings glut" is the one I like the most (even though I don't like Krugman). Right now there is so much saved cash out there looking to be lent out that any project looking for financing can find it for cheap.
The Fed does not keep interest rates low in a vacuum. There is an auction system that determines real rates. If the Fed is not able to sell all their bonds at the target rate, they have to adjust.
In the long run, I think we will see:
1. (at risk of calling this bull market a "new normal") P/E ratios for stock will continue to climb in a secular fashion. Low returns from the alternative investment of bonds will dictate high P/E ratios.
2. Debt financing will remain cheap. Low interest rates signal cash that is desperate to find a place to park it.
3. Government debt will remain popular and affordable. This is a win for Keynesians.
4. Secular low interest rates are an indicator of a stable and mature economy, which is good. The bad part is that they signal a world where obvious available capital investment projects are missing- we seem to have picked the low hanging fruit.
5. Next recession the U.S. will hit the zero lower bound, and we will see lots of QE and/or nominal negative interest rates through some institutional mechanism.
6. Increasing government deficits look better when interest rates are low.
7. Speculative: Deficit spending can increase indefinitely if real interest rates are below 0 (aka nominal rates are below inflation). To put it in other terms: Any deficit spending is free money up until the point that it causes inflation to rise about the nominal interest rate.
> The Fed does not keep interest rates low in a vacuum. There is an auction system that determines real rates. If the Fed is not able to sell all their bonds at the target rate, they have to adjust.
To my understanding, there is a real public market, however the Fed essentially manipulates by participating to the degree necessary to achieve the target interest rate. When the overnight repo rate went up, the Fed hopped in to 'fix' the rate. You will never have enough assets to compete with the Fed's goals. They have limitless capacity to participate in the market.
In Economics, secular essentially refers to long-term trends regardless of boom-and-bust business cycles. The focus is on the long term. In the context of economics it has nothing to do with religiousness.
A secular trend is a variable that evidences a consistent pattern within a given period of time. It is a statistical tendency that can be easily identified and it is not subject to seasonal or cyclical effects. (https://www.myaccountingcourse.com/accounting-dictionary/sec...)
The Fed does not keep interest rates low in a vacuum. There is an auction system that determines real rates. If the Fed is not able to sell all their bonds at the target rate, they have to adjust.
In the long run, I think we will see:
1. (at risk of calling this bull market a "new normal") P/E ratios for stock will continue to climb in a secular fashion. Low returns from the alternative investment of bonds will dictate high P/E ratios.
2. Debt financing will remain cheap. Low interest rates signal cash that is desperate to find a place to park it.
3. Government debt will remain popular and affordable. This is a win for Keynesians.
4. Secular low interest rates are an indicator of a stable and mature economy, which is good. The bad part is that they signal a world where obvious available capital investment projects are missing- we seem to have picked the low hanging fruit.
5. Next recession the U.S. will hit the zero lower bound, and we will see lots of QE and/or nominal negative interest rates through some institutional mechanism.
6. Increasing government deficits look better when interest rates are low.
7. Speculative: Deficit spending can increase indefinitely if real interest rates are below 0 (aka nominal rates are below inflation). To put it in other terms: Any deficit spending is free money up until the point that it causes inflation to rise about the nominal interest rate.