That’s a bit of a straw man argument. Why would the Fed want 5% nominal rates for 30+ years?
Also, the Fed mostly thinks about output and rates in real terms when thinking about the long term.
Also, the Fed mostly thinks about output and rates in real terms when thinking about the long term.
This is a strawman. I said nothing about the Fed wanting 5% rates.
I'm simply saying rates are not going to be higher for a LONG period of time because - if you look at the math - a sustained period of high interest rates with our current public debt to GDP means that public spending would have to fall dramatically (which would crush GDP in itself - a negative feedback loop).
Substitute 5 for any non-negative number, and you'll see that any number higher than 0 LONG TERM means a cut to public spending.
You multiply the increase by ~3.5x (to include effects from state & local governments) and then you multiply by ~4x (because taxes aren't 100% of GDP - their ~25%).
A 1% LONG TERM increase in interest rates means a ~14% reduction in public spending (with the same tax burden).
The US Federal Government is already spending about ~14% of GDP on SS, Medicare, Medicade, and Debt Service. Considering that our tax revenues is only ~17.6% of GDP. Good luck cutting spending by 14%. Let alone 2x or 3x that.