10 Year Treasury Yields 2.32%

Totally crazy.  What is the Fed doing? 

Update #1 (Aug. 9, 6:30 pm): make that a yield of 2.2% on the 10 year Treasury. 

To make clear: this is a sign of monetary policy that has been far too tight.  The TIPS implied real return on 10 year Tresasuries right now is, just coincidently, 0.00%, with negative real yields at shorter maturities.

We need a signal from the Fed that rates will stay low even during a rebound in spending and the price level.    That we don't have this even now is crazy. 

Update #2: Doug comments:

Do you think the problem is that monetary policy is too tight? Or that with the real economy so weak there is zero actual return on capital?

The simple theory here would be 'too tight money -> low demand -> low real activity -> low real returns on capital -> low real rates.'   Don't think of the real return on capital as exogenous but as driven by the utilization of capital.   The bigger problem in interpreting this data along these lines is that treasuries don't have a tight (or even very loose?) relationship to 'return on capital'. 

Update #3: as far as I know, there is surprisingly little research on this channel of monetary policy, though it seems like it ought to be a major transmission mechanism.  One of the issues I have thought about looking into, thought it has all the usual macroeconomic modeling pitfalls. 

Comments

[Doug]

Do you think the problem is that monetary policy is too tight? Or that with the real economy so weak there is zero actual return on capital?