The Fed's Altitude Problem

June 15, 2016
Insight - Fed faces battle to escape world's low interest rate grip

That is a far cry from the 3.5 to 4 percent that the Fed's policy rate has averaged since the 1990s, and means the central bank will treat each move with particular caution, current and former Fed officials say.

The Fed's been here since 1913. In 1954, 25 years after the Great Depression began, the Fed's policy rate was a mere 1%. It took another 27 years to peak at 22% in 1981. Barring the cyclical ups and downs, it's been falling ever since.

So what makes the 3.5 to 4 percent since the 1990s so special? How did it somehow become the benchmark for what is normal?

Control Tower: We show your altitude at 120 feet. Can you confirm?
Captain Yellen: Our instruments show 120 feet.
Control Tower: Increase altitude to 4,000 feet.
Captain Yellen: What it was 90 minutes into the flight?
Control Tower: Yes, 4,000 feet.
Captain Yellen: We have increased altitude to 370 feet.
Control Tower: Please increase altitude to 4,000 feet.
Captain Yellen: In order to reach 370 feet, we had to reduce airspeed.
Control Tower: Maintain airspeed!
Captain Yellen: We had no choice. One of our other gauges is dangerously low.
Control Tower: Which gauge?
Captain Yellen: Fuel. Shows empty.
Control Tower: When did this happen?
Captain Yellen: 81 minutes into the flight.
Control Tower: What was your altitude at that time?
Captain Yellen: 21,000 feet. We've been gliding ever since.
Control Tower: Why didn't you tell us then?
Captain Yellen: We didn't want you to panic.
Control Tower: At least you still have use of the control stick. That's something I guess.
Captain Yellen: It's a bit loose and accommodative.
Control Tower: WHAT? HOW LOOSE?
Captain Yellen: Let's just say that the flight attendants are currently asking the passengers if they can spare any duct tape or crazy glue.