NEW HAVEN – Ever since the “Great Recession” of 2007-2009, the world’s major central banks have kept short-term interest rates at near-zero levels. In the United States, even after the Federal Reserve’s recent increases, short-term rates remain below 1%, and long-term interest rates on major government bonds are similarly low. Moreover, major central banks have supported markets at a record level by buying up huge amounts of debt and holding it.
Why is all this economic life support necessary, and why for so long?
It would be an oversimplification to say that the Great Recession caused this. Long-term real (inflation-adjusted) interest rates did not really reach low levels during the 2007-2009 period. If one looks at a plot of the US ten-year Treasury yield over the last 35 years, one sees a fairly steady downward trend, with nothing particularly unusual about the Great Recession. The yield rate was 3.5% in 2009, at the end of the recession. Now it is just over 2%.
Much the same is true of real interest rates. During the Great Recession, the ten-year Treasury Inflation-Protected Security yield reached almost 3% at one point, and was almost 2% at the recession’s end. Since then, the ten-year TIPS yield has mostly declined and stayed low, at 0.5% in May 2017.
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