These policies did succeed in lowering long term interest rates.

The Federal Reserve s policy of long term asset purchases, also known as quantitative easing, has intentionally kept long term rates low.

So what will happen when central banks start raising interest rates? In 1994, rising short term rates caused increases in long term rates and declines in long term bond prices that were at least double what standard models at the time were predicting.

Remarkably, as short term interest rates rose, medium and long term interest rates did not, something that was referred to as a conundrum.

In short, QE lowering long term interest rates by buying long term bonds and mortgages won t do much to stimulate business directly.

QE2, in which the Fed bought long term government bonds, did not have a discernible effect on long term government interest rates.

Moreover, low long term interest rates are a thing of the past.

The traditional signals provided by inflation expectations, long term interest rates, and exchange rates have not started flashing.

Hence, real long term rates remained quite high in the mid 1980 s.

The reason for today s unsustainably low long term rates is not a mystery.

But the immediate effect on long term bond rates has not been encouraging.

Recently, several banks have been able to issue long term bonds at affordable rates.

The Federal Reserve is of a similar mind, not only maintaining rock bottom short term interest rates, but also embarking on an adventurous policy targeting long term rates.

Given today s exceptionally low long term interest rates, the annual cost would be, well, peanuts.

If central banks are tightening and long term rates aren t rising, one needs some explanation.

Inflation implies higher long term interest rates until markets regain confidence in the central bank.

Here, monetary authorities must be vigilant, and continue their non standard interventions managing both short term and long term interest rates.

Either way, a rise in long term interest rates is liable to choke off the recovery.

But, even after disinflation in the mid 1980 s, long term interest rates remained relatively high.

As long term investors, SWFs can help to reduce market volatility through financial intermediation, as well as contribute to financing projects with positive but long term rates of return.

An expectation that interest rates will be high sometime in the next decade should mean high interest rates on long term bonds today.

The US is not the only country with very low or negative real long term interest rates.

It also lowered long term interest rates in the US and made monetary conditions there more expansionary.

So, if inflation is low and stable, central banks cannot be blamed for low long term rates.

Given modest inflationary pressures, long term real interest rates rose but nevertheless remained close to historical lows.

If it falls 40 against the yen sometime in the next ten years, US long term interest rates should be four percentage points higher than Japanese rates. If it falls 60 against China s currency, the yuan, sometime in the next ten years, US long term interest rates should be six percentage points higher than Chinese rates.

But, even with that decline, many countries long term interest rates will most likely remain higher than their growth rates for the next several years.

NEW HAVEN Real long term interest rates that is, interest rates on inflation protected bonds have fallen to historic lows in much of the world.

Yet financial markets are not pricing dollar depreciation and a rise in long term US interest rates accordingly.

While projections of China s future growth vary, all predict weaker economic performance in the short term and even lower growth rates in the long term.

Investors are buying long term bonds at the current low interest rates because the interest rate on short term investments is now close to zero.

CAMBRIDGE Long term interest rates are now unsustainably low, implying bubbles in the prices of bonds and other securities.

The Fed has pursued its strategy of low long term interest rates in the hope of stimulating economic activity.

But not now given extraordinarily low long term interest rates, no serious economist raises the crowding out issue nowadays.

First, while the US Federal Reserve continued hiking short term interest rates, long terms rates did not increase in tandem, which allowed housing prices to continue rising.

Also, if exit occurs by selling the long term assets purchased during QE, a sharp increase in interest rates might choke off recovery, resulting in large financial losses for holders of long term bonds.

But what of the future? The recent rise in long term interest rates is just the beginning of an increase that will punish investors who are seeking extra yield by betting on long term bonds.

One oft heard justification for high asset prices is that real (inflation adjusted) long term interest rates are very low.

Moreover, ECB chief economist Otmar Issing predicts long term interest rates would go up not down as inflationary expectations increased.

Ordinarily, rapid global growth translates into high long term interest rates that is, unless, deep down, people have become nervous.

The hope is that if investors consider this announcement credible, long term interest rates will come down further, encouraging spending.

Surely, governments levels of long term investment in infrastructure, education, and research should be much higher now than they were five or ten years ago, when long term real interest rates were roughly twice as high.

Within a couple years, interest rates on long term US Treasury notes could easily rise 3 4 , with interest rates on other governments paper rising as much, or more.

Or, if these deficits are monetized, high inflation may force up long term interest rates and again choke off economic recovery.

The pound initially fell sharply, and then recovered, while long term government borrowing rates have risen by around 30 basis points.