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What Would Interest Rates Be In A Perfect World?

In the Fed's perfect world scenario, where inflation was at an exact 2% every year, what would they set interest rates at?  Would it be higher or lower than 2%?  Exactly 2%?

I'm just wondering because that would give us an idea of what the future of bond funds might look like.  For example, what price would TLT be if we had a perfect 2% inflation rate every year?  What interest rate would savings accounts pay?

Thanks in advance for any thoughts.

Hi @bikeeagle1,

That's a great question.

The Fed doesn't really care what the interest rate is. They care what employment and prices are. So, by keeping rates at 0% they're trying to positively influence employment without creating inflation. IMO interest rates are an extremely blunt instrument and possibly an ineffectual instrument outside of very high inflations.

My personal view is that the govt should always maintain a real rate on their debt. In other words, the overnight rate should just be pegged to something like PCEPI or core inflation and automate it. No discretionary tinkering. Just an automated rate that pays people a real rate on their savings.

Hope that helps.

Quote from Cullen Roche on 02/04/2021, 9:43 AM

My personal view is that the govt should always maintain a real rate on their debt. In other words, the overnight rate should just be pegged to something like PCEPI or core inflation and automate it. No discretionary tinkering. Just an automated rate that pays people a real rate on their savings.

I agree 100%.  As a near retiree, it seems somehow unfair to me that a simple savings account doesn't pay enough interest to keep up with inflation.