Bronze Supporter
- Messages
- 8,304
- Reactions
- 18,142
Amid the debate over whether and when the Federal Reserve cuts interest rates, another important argument is unfolding: where do rates settle in the long run?
At issue is the neutral rate of interest: the rate that keeps the demand and supply of savings in equilibrium, leading to stable economic growth and inflation.
For the last 40 years, and especially following the 2008 financial crisis, economists and Fed policymakers steadily revised down their estimates of neutral. This view became embedded in bond yields, mortgage rates, equity prices and countless other assets.
But now, some see reasons for neutral rising, with the potential to change a wide range of asset prices.
The neutral rate, sometimes called "r*" or "r-star," can't be directly observed, only inferred. Five years ago, after the Fed raised its benchmark federal-funds rate rate to 2.4%, officials saw signs of feeble growth and inflation and began lowering rates—implying neutral must have been around that level, or lower.
At issue is the neutral rate of interest: the rate that keeps the demand and supply of savings in equilibrium, leading to stable economic growth and inflation.
For the last 40 years, and especially following the 2008 financial crisis, economists and Fed policymakers steadily revised down their estimates of neutral. This view became embedded in bond yields, mortgage rates, equity prices and countless other assets.
But now, some see reasons for neutral rising, with the potential to change a wide range of asset prices.
The neutral rate, sometimes called "r*" or "r-star," can't be directly observed, only inferred. Five years ago, after the Fed raised its benchmark federal-funds rate rate to 2.4%, officials saw signs of feeble growth and inflation and began lowering rates—implying neutral must have been around that level, or lower.