Interest rates

[joenorm]

When I was a kid my dad encouraged me to put what little money I had into a CD. I went to the bank and transferred $3,000 into a CD that earned 5% interest for 12 months. Just like that, easy returns.

That option existed for what seemed like only a few years. Since then I have not known anything like it. Are those days gone forever?

My parents talk about borrowing money at 10-15% when they bought their first house. I just took out a mortgage at 2.875%.

What is going on here? Are interest rates seen as being on a cyclical pattern and they will return to higher rates in a matter of time? Or has something fundamentally shifted in the economy?

[theolympians]

I believe the feds have been lowing rates for years as an incentive to borrow money and keep  money moving. That adversely affected the bond market and savings accounts.

Now the rates are so low, I think they at a loss what to do. I am sure they would like to raise them to encourage purchase of our debt. Whenever there is talk of raising rates, the market grumbles.....We might be stuck for now.

I wish I had the answer!

[reeshau]

The current interest rate environment is not a product of the economy, but rather extraordinary intervention by central banks around the world.  When 0% interest rates alone weren't enough to juice the economy during the 2008 financial crisis, central banks began buying debt.  (The graph below shows the Fed's total assets)  With willing buyers not based on profit motivations, interest rates have been held low.  Except, even with this pressure, treasury rates are rising.  While that has spooked the stock market over the last month, I see it as a good sign that people aren't trying to buy safety at any cost.

And the US is particularly skewed, because there also are a large number of foreign buyers, particularly from the EU trying to escape nominally negative rates--in Germany and Switzerland, you are charged for the privilege of depositing your money.

Having said that this is a novel situation, and nothing natural, it will also take some novel situations to get out of it.  It won't last forever, but there will be some bumps in the road for the Fed to get out of this business.

[MustacheAndaHalf]

I believe the feds have been lowing rates for years as an incentive to borrow money and keep  money moving. That adversely affected the bond market and savings accounts.

Now the rates are so low, I think they at a loss what to do. I am sure they would like to raise them to encourage purchase of our debt. Whenever there is talk of raising rates, the market grumbles.....We might be stuck for now.

It's not like the Fed's intentions are a secret - they meet every 3 months and disclose their intentions publicly.

"The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time"
https://www.federalreserve.gov/newsevents/pressreleases/monetary20210317a.htm

Per that quote, they do not want to raise interest rates.  One of their goals, mentioned above, is "maximum employment", which is hurt by higher interest rates.

[bwall]

When I was a kid my dad encouraged me to put what little money I had into a CD. I went to the bank and transferred $3,000 into a CD that earned 5% interest for 12 months. Just like that, easy returns.

That option existed for what seemed like only a few years. Since then I have not known anything like it. Are those days gone forever?

My parents talk about borrowing money at 10-15% when they bought their first house. I just took out a mortgage at 2.875%.

What is going on here? Are interest rates seen as being on a cyclical pattern and they will return to higher rates in a matter of time? Or has something fundamentally shifted in the economy?

One reason I suspect that there are so few replies, is that these are very difficult questions, although they might not seem like it.

College Economics classes could spend the entire semester talking about the questions posed--and probably still not come to a satisfactory conclusion.

I'd encourage you to look up some posts by ChpBstrd on this subject. He has given very well thought out answers on this subject that might begin to paint a picture.
Related topics, demand shortfall, deflation, Japanification, and the breakdown (?) of the link between inflation and unemployment.