Why Are Long-Term Interest Rates Still So Low?

In a thought-provoking post, Brad DeLong ruminates on the fact that bond prices yields are far below where most economists think they should be.

My two favorite explanations:

1. Vast quantities of foreign demand for US bonds is keeping bond prices high. As the Treasury report mentioned in the post below indicates, foreigners (especially central banks) are plunking down $20 to $30bn every month to buy US government bonds. I think that should be plenty to keep prices significantly higher than they would be otherwise. In addition, some of those buyers (again, especially central banks) have other priorities (such as exchange rate goals) that supercede their beliefs about the future of US inflation and interest rates.

2. Short-term rates affect long-term rates. The fact that the Fed is keeping short-term rates so low for so long does seem to cause long-term rates to fall. Yes, the Fed is supposed to only be able to affect short-term rates, but as one of my friends at the Board of Governors says, “I don’t know how or why, but we DO have control over long-term rates.”