08.20.23
Why the Era of Historically Low Interest Rates Could Be Over
by: Nick Timiraos
With the U.S. economy performing surprisingly well as interest rates remain at a 22-year high, some economists are questioning whether rates will ever return to the lower levels that prevailed before 2020. At issue is what is known as the neutral rate of interest. It is the rate at which the demand and supply of savings is in equilibrium, leading to stable economic growth and inflation. With inflation now falling but business activity still firm, estimates of the neutral rate could take on greater importance in coming months. If neutral has gone up, that could call for higher short-term interest rates, or delay interest-rate cuts as inflation falls. It could also keep long-term bond yields, which determine rates on mortgages and corporate debt, higher for longer. “Conceptually, if the economy is running above potential at 5.25% interest rates, then that suggests to me that the neutral rate might be higher than we've thought,” said Richmond Fed President Tom Barkin, though he added that it is too soon to come to any firm conclusions.
Read the full article on Wall Street Journal