Here is some thoughts from Alan Greenspan, who thinks rates will have to go up much higher. He actually thinks double-digit rates are needed. Note that this discussion is with the long-term (25 years) whereas the current Federal Reserve actions are for the short-term (recession etc). Anyway, interesting, and I think Jerome sort of touched on this. Read the bottom part of the linked article.
In coming years, as the globalization process winds down, he predicts inflation will become harder to contain. Recent increases in the price of imports from China and a rise in long-term interest rates suggest "the turn may be upon us sooner rather than later."
Left alone, he said, the Fed's policy-making body, the Federal Open Market Committee, can keep inflation between 1% and 2%, but that could require forcing interest rates to double-digits, a level "not seen since the days of Paul Volcker," his predecessor as Fed chairman. "I fear that my successors on the FOMC, as they strive to maintain price stability in the coming quarter century, will run into populist resistance from Congress, if not from the White House," he writes.
If the Fed succumbs to that pressure, inflation could rise from a little over 2% at present to an average of 4% to 5% by the year 2030, he writes. Ten-year Treasury yields, now below 5%, will rise to "at least 8%" with the potential to go "significantly higher for brief periods." This, he says, will lead to stagnant returns on stocks and bonds and much smaller gains in housing prices.
(source: WSJ online)
I disagree wtih Greenspan's views for the reasons I cited in my previous post. Note that he prefaces his comments on the basis of so-called Globalization ending. I don't think it will! At least not within 25 years. There are so many countries that are still not part of the free-market system that I think it will take a lot longer for what Greenspan describes to materialize.
However, I do expect interest rates to go up over the long term (they are low by historical standards right now) but do not think it will stay in double digits for any period of time.
I agree with Greenspan that asset prices, whether stocks, or bonds, or whatever, will have lower returns in the future than in the last 25 years. If interest rates go up, it is a given that real return on assets will drop.
