Aha. It seems that many people don’t realize that the view that the Fed is the only thing holding down interest rates has been tested — and failed. So, a bit more.

The big test came from QE2, a program of large-scale Fed purchases of long-term government debt that began in November 2010 and ended in June 2011. You can see the program in the Fed’s holdings of such debt:

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The burning question at the time was what would happen when the program ended and the Fed stopped buying more long-term debt. Many people, very much including Bill Gross, predicted a spike in rates; those of us holding the “stock view”, including both me and Ben Bernanke, disagreed. In the end, there was no spike — which constituted strong evidence against the whole notion that the Fed is what’s holding down rates.

Yet the Fed story, which came into prominence in the first half of 2011, now continues to be an article of faith among many people, showing yet again that for such people evidence that runs contrary to their prejudices doesn’t matter.