Will bonds ever return to “normal?”
It’s a good question. For over four years the Fed has kept short rates near zero. With inflation running at 2% and the Fed’s target at zero, short rates have become a black hole, from which nothing seems to emerge. Long rates have drifted inexorably towards the event horizon surrounding the Fed’s short-rate singularity.
But all things—even black holes—eventually come to an end. The Fed currently projects that the economy will gradually heal, and that unemployment will move below 7% by the end of 2014, and below 6% in 2017. Charles Evens, President of the Chicago Fed, has proposed that the Fed keep rates low and the QE flowing until unemployment gets below 6.5%. That would be sometime in late 2015—but of course, the further out the forecast, the greater the uncertainty.
Still, it’s useful to know current expectations. So far, the Fed’s monetary spigot has kept the economy moving. It looks like it will be a while before they take that punchbowl away.
Douglas R. Tengdin, CFA
Chief Investment Officer
If you have questions or comments, please write to us at questions.