[NeoCaveman]

What that means is that 3 1/2 years after the economy first emerged from recession, Fed policy is AT LEAST 75bps UNDER neutral. Hence, the Fed still has its foot on the gas pedal even though the economy has been growing for 14 straight quarters. This is way too aggressive, and is a large culprit for the current expanding real estate bubble.

The yield curve is basically flat because short term rates (which have gone from 1% to 2.75%) have not pushed up long term rates (the ten year bond is at under 4.5%). How much more can he raise them with the market (the long bonds) not raising? BTW I do agree that a 3.5% FF rate would be reasonable.

[Only Waxing]

Well, I wouldn't call this a flat yield curve. Right now, there's basically 200bps between short and long rates. That's not flat. That's actually pretty steep for this late into a recovery. With that much of a spread, banks have a lot of profitability with all of their loan rates thereby exacerbating the real estate expansion.

Taking this a step further, one of the problems in the mortgage market right now is the low bill rates making adjustable negative amortization loans so popular. To really cool this real estate market off, the Fed needs MUCH higher short-term rates that scare people away from ARMs. Only then will this bubble stop being inflated.