The following chart illustrates the US Federal Funds rates since 1950s. The interest rates are close to their level in the 1950's and far above where they were in the recent years. One question that we could ponder is: Is the USA headed the Japan way, where zero interest rates have been the norm for the past few years. Even if the US was not to stagnate like Japan for a decade, if the economy remains tepid for a prolonged period of time (say more than 2 years) then it could unleash its own set of problems.
If the economy continues to remain tepid (even by the most optimistic estimate) what it would be like if the US Fed were to start raising interest rates? The simple (and probably most generalised) would be that it would relapse into another downturn. We would believe that the US Fed would have great difficulty in raising rates till at least about October 2009 (if they can actually do it by then). Anyway, the US Fed Rate futures indicate that the interest rates will remain unchanged till March 2010. The question is if the US Central Bank can increase the rates after that.
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