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Monday, February 28, 2011

When Will The Federal Reserve Raise Interest Rates?

I saw some other blogs debating when the Federal Reserve is going to start raising interest rates.

You can read that from the yield curve. According to Yahoo Finance, the current yield curve is:

3 Month0.11
6 Month0.14
2 Year0.72
3 Year1.2
5 Year2.16
10 Year3.41
30 Year4.5

The current Fed Funds Rate is 0%-0.25%. Looking at that chart, you can see that there isn't going to be a rate increase for 6 months.

Looking at that chart, the 1 year Treasury bond yield two years from now will be approximately 2.16%. (1/3)*2.16 + (2/3)*0.72 = 1.2.

A similar argument shows that the yield on a 1.5 year bond will be 0.91% in 6 months.

That isn't exactly right, because the yield curve is upward-sloping. The yield projected by the yield curve is slightly greater than what yields actually will be in the future.

Looking at the current yield curve, the Fed Funds Rate should stay at 0%-0.25%. It should be around 0.5% in a year and 2.0% in two years. That isn't an exact match, because the yield curve is upward sloping. Banks profit borrowing at the Fed Funds Rate and by buying longer bonds.

Interest rates are low even though inflation is high. Through their monopoly money-printing power, the Federal Reserve insiders can set interest rates at whatever level they want.

The Federal Reserve directly sets the Fed Funds Rate. Longer term rates are based on future Federal Reserve policy expectations. Looking at the yield curve, the Fed Funds Rate should increase to around 2% in two years.


Anonymous said...

steamroller says:
Why would anyone think the profligate spenders in government would want to pay more interest on the ballooning deficit/debt? Of course they wouldn't! But the Fed Res does the bidding of those who control its continued existence. The same congress that says: "We don't care how much we owe....what we need to know is; HOW MUCH MORE CAN WE OWE?
Thus, the biggest debtor in history in effect sets its own interest rates, continuing the ruse and corruption.

gold said...

IF the Fed starts raising interest rates then you better hold on to your hats, because there will be a market collapse. We are trillions of dollars in debt, and rise in interest rates will raise or debt even more and the financial system will come crashing down on us. Gold and silver are good hedges.

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