I am no pro, dont even work in the field. So take whatever I say as meaningless watercooler banter and dont invest on anything I say.

Rates are being held low cause they have to. I dont know where to get the numbers but demand for morgages does a swan dive when rates approach 6.5%. Look at our jumbo market, people are bemoaning the terrible 7% jumbos out there, and they CAN afford it. If the fed followed father Paul’s preaching and RAISED rates like they need to be to defend the dollar, housing would be road kill. How many people here want to buy a house at 9%? The fed has capital impared banks that are on life support at 2.25%. Immagine 7%. So rates will stay low till the banks can live without them (2010?).

As for HOW this is gonna happen, that is debateable. The current party line goes something like this. “We are currently in a slow down, not a recession. Because of this “slow down”, inflation will fall as demand slackens. Then, our Federal stimulus package will put money in the hands of consumers and all will be well again as demand picks back up again in the resulting rise, but inflation will be tamed permanatly.” This has the same smell, look and texture as the stuff on my toilet paper after finishing up.
More likely we’ll just eat higher inflation for a while and then be told that we did it to save our economy and country. Sure, mistakes were made, but no one could have seen them coming and there was no way to plan for it, so we have learned our lesson and itll be better in the future cause I said so. (why not? it worked with 911, Iraq, Katrina, Afganistan, No child left behind, deficit spending,……………….)

Now the fed has to silence those that are being robbed by all this (savers) so they goose the numbers alittle. If the offical inflation rate is 4-5%, we just say that CORE inflation is more important. Now that is high too, but who cares, it is only 2.4%. Core inflation strips out all those nasty sectors that arnt playing nice right now, too bad we still are not in the “Comfort Zone”.
Now mind you that chart in the OP was based on inflation calculations that are not used anymore. I hear “old school” inflation is really about 7-8% maybe 10%, not 4-5%, but since the late 1990’s we calculate inflation differently. Amazing that we came up with a system that suits our need to have CONSISTANTLY low inflation, who would have thunk it?

If all else fails, LIE. Our supposed rebound comes in 3-4 months, just like it was suppose to be now 3-4 months ago, and 3-4 months ago 8-9 months ago. It has been said over and over again since the music started to get quiet in late 06. Eventually they will be right.
Oh and leave it to the aussi press to find this about the rate that the fed doesnt control…… I have no idea if it is true, but it wouldnt suprise me.
http://www.theaustralian.news.com.au/story/0,25197,23551198-36375,00.html

Plus, the markets are still more concerned about missing out on the next boom than capital preservation. Even after all this some banks are ramping UP ARM’s and other affordability tools to get in on the rebound. As long as just about every national or major regional player is too big to fail, risk is limited but rewards are sky high.

So where does this leave us? Addicted to low rates. Inflation will rage, lies will be told, promises will be made and eventually this will all go away. Then rates will go up alittle and increased regulation and gov support will be promised to negate the need of higher rates. So, dont worry. You will still get that 6% interest rate next year, all of our best laid plans rely on it, and you know what they say about those.