Central banks are reactive.
The Fed sets interest rate targets, and the intervenes, maasively if necessary, in the market to acheive them.
> If the Fed raised rates 500bps tomorrow, over time, interest rates would still settle back at 0%
The only reason rates are near zero is that the Fed has set its rate target near zero and intervened massively in the market to attain that target. If the Fed raised its rate target and kept it higher, rates would rise and stay higher. When the Fed target, was higher (most of the Fed’s history), interest rates remained higher.
The Fed doesn't set its targets based on what it thinks the market would do without intervention, but based on what it thinks needs to happen to achieve its balance of employment and price stability objectives.
> Central banks are reactive.
You bracket your post, beginning and end with it, but you don't seem to understand that all it means is that Central Bank action goals respond to observed conditions. You act as if it means the Central Bank is impotent to affect conditions, and in particular interest rates, which is clearly false.
So as the 30YT falls, the Fed can do nothing but allow it to fall further.
Wrong. They can set the Fed fund rate target anywhere they want. The same interventions that move the rate the target addresses toward the target also normally move other rates, including various Treasury rates, in the same direction, which is why Fed action on the Ged funds target is usually discussed as action on interest rates, not just the single rate the target nominally applies to.
> Any higher and we get a yield curve inversion and a recession[0].
Yield curve inversions (in any of the Treasury rates, not just the 30-year) are typically viewed as potential recession signals because they reflect an abnormal decoupling of usually-linked behavior representing broad insecurity with the investment opportunities in private markets. They are not viewed as causing recessions, and thus the 30 year Treasury rate is not a constraint on Fed funds targets.
Anywhere they set the Fed fund rate, there will be consequences, of one kind or another. The Fed is trying for the lest-bad set of consequences, and therefore their possible policy is severely constrained.
Sure, the “consequences of doing so” is how they choose where they want to set them.
The upthread suggestion that the 30yr Treasury rate puts an effective cap on target rates because a yield inversion will cause a recession (and, implicitly, Treasury rates are unresponsive to the policies that are used to achieve the Fed funds target) remains false and based on mistaking a symptom with a cause of recessions.
Should the Fed set interest rates arbitrarily? No, but that was not what was being discussed.
The Feds have some scope to nudge the interest rate, but they cannot massively change it against the market. The persistent low rates of the past 2 decades are mostly market driven, because there's been a lack of growth.
The feds try to nudge lower the rates past the "natural" rate (a rate as if they weren't there), but the trend of the rates being down isn't determined by the Feds.
The feds have the ability to influence rates a bit, but not set them directly as they wish.
This blog post summarizes my opinion https://www.themoneyillusion.com/monetary-policy-and-interes...
that's an implicit assumption all rational economists would have. It's like saying the US could just be holding the entire world hostage by threatening to nuke the entire world.
The blogpost you linked is basically confirming that the feds don't have unlimited room for controlling interest rates. they can merely nudge it a bit here and there, and hope for the best.
I like the analogy of the bus driver through the Alps.
Targeting low inflation is price stability and assuming every single central bank targets the same inflation target then you implicitly target a specific exchange rate (with some fluctuations). If you set the interest rate arbitrarily people flee the currency and break the implicit peg which can manifest itself as inflation.
I am unsure why you think that 0% is the natural rate for rates (I'm assuming you mean real as the alternative misunderstanding is even worse). People prefer to have money now rather than money later.
According to the Friedman Rule 0% interest is an ideal interest rate assuming no inflation or deflation. However, what ideal really means in practice and whether we can actually have no inflation is still unknown.
By far the biggest supplier of credit are banks, not private individuals - and their supply is effectively dictated by the Fed.