Both the short-term rates controlled by the Federal Reserve and the longer-term rates determined by the bond market did drop sharply, during and after the last financial crisis. But since then, inflation has remained low, the rate of economic growth has been modest and interest rates have never returned even close to their prerecession levels.
The 10-year Treasury note in 2007 was as high as 4.85 percent, Treasury data shows. It hasn’t been much above 3 percent in the last five years. And the federal funds rate, the short-term interest rate set by the Federal Reserve, reached 5.25 percent in 2006. It rose to only 2.5 percent in 2018 and 2019, and now is in the 1.5 to 1.75 percent range, according to the Fed.
Rates this low, this long, aren’t normal.
The United States has entered dangerous territory, a paper published last month by the Federal Reserve emphasized. The paper, written by the Fed economist Michael Kiley, says that the current low level of rates will cause severe policy dilemmas when the next recession actually hits.
Historically, interest rates tend to decline significantly during recessions and for two years afterward, Mr. Kiley wrote. But with rates as low as they are now, he said, “simple arithmetic” shows that in a recession, both short-term interest rates and those for bonds will approach zero — or even be negative. That, he says, will bring the “U.S. experience closer to that seen in Europe and Japan,” where many long-term bonds are already paying negative interest.
As I wrote several years ago, this amounts to the kind of proposition expected from gangsters: Hand me your money, watch me skim off some of it and you get what’s left later. Yet it’s become commonplace in the global bond market.
That might not happen in the United States, Mr. Rosenberg said, because of “legal and logistical constraints.”
“Negative rates are a tax on money,” he said, “and it’s one thing to have them in Japan and Germany, but something else entirely when you’re talking about the world’s reserve currency, the dollar.”