Low Rates Will Return
A Low Fed Funds Rate Will Return, Just Not Immediately.
I do not buy the narrative that the days of the Fed’s “ultra-low rates” are over.
Treasury has more than $6 Trillion of debt that will mature within a year and that figure will grow.
Treasury has another $14 Trillion of debt that will mature within the next 10 years and that figure too will grow.
Under the current Fed Funds scheme, banks must operate in an interest rate environment where short rates are significantly higher than long rates (meaning short-term money - i.e., depositor funds - get paid out at a higher rate than the baseline Treasury rate on long-term loans. It is difficult for banks to be profitable in such a rate environment).
Therefore, given Treasury’s debt position and given banks’ collective operating position, there is no scenario in which the Fed may keep rates elevated over the long-term. It is foolish to believe that the Fed may force fiscal discipline on Congress by maintaining an elevated Fed Funds rate.
The market, however, may exercise fiscal discipline by raising yields on the long end of the Treasury yield curve. Eventually, Treasury investors will want to be appropriately compensated for holding Treasuries at the long end of the curve (given regular Trillion Dollar-plus fiscal deficits). This means yields on the 10-year will someday be much higher than anyone once thought possible. We will see a 10% yield on the 10-year Treasury in my lifetime regardless of what Fed policy may be.