The long-term potential growth rate for the economy is about 4.5% in my opinion - 3% for productivity growth, if the economy is left to its own devices that is, and 1.5% for labor market growth.
There is, therefore, no justification for rates to be higher than 4.5%. All this does is cut productivity, which is partially a function of growth, and all that does is lower the maximum growth rate of the economy, which just makes inflation worse. If you pull up a chart of the yield on the 10-year over the past two years, you'll notice that 4.5% was at first resistance and is now support. On the way back down, once the economy slows enough to make this a good trade, 4.5% will once again be support. The only reason for Fed Funds to be at the stupid and insane level of 5.25% is so that Ben can show what big balls he has. (If you think it isn't insane, explain why the yield curve has been inverted for just about the entire time Fed Funds have been at this level.) This makes the Chinese giggle, since it makes their task of keeping the yuan undervalued that much easier.
In short, the absolute maximum level for Fed Funds should be 4.5%. A sane, neutral level would be more like 3.75 to 4%. The market has been fairly shouting this for years now, via the inverted curve and the bloated current account deficit; the Fed has, of course, been deaf. As usual.
There is, therefore, no justification for rates to be higher than 4.5%. All this does is cut productivity, which is partially a function of growth, and all that does is lower the maximum growth rate of the economy, which just makes inflation worse. If you pull up a chart of the yield on the 10-year over the past two years, you'll notice that 4.5% was at first resistance and is now support. On the way back down, once the economy slows enough to make this a good trade, 4.5% will once again be support. The only reason for Fed Funds to be at the stupid and insane level of 5.25% is so that Ben can show what big balls he has. (If you think it isn't insane, explain why the yield curve has been inverted for just about the entire time Fed Funds have been at this level.) This makes the Chinese giggle, since it makes their task of keeping the yuan undervalued that much easier.
In short, the absolute maximum level for Fed Funds should be 4.5%. A sane, neutral level would be more like 3.75 to 4%. The market has been fairly shouting this for years now, via the inverted curve and the bloated current account deficit; the Fed has, of course, been deaf. As usual.
