Why the US neutral rate will fall below pre-pandemic lows

While US policy rates will rise further in the near-term, the long-run neutral rate – the interest rate consistent with inflation at the 2% target and production at its full potential – remains structurally low, according to our modelling.

What you will learn:

• We estimate the nominal neutral rate will rise to around 3% this year, but only because of mounting inflation expectations. As expectations normalize, we think the nominal rate will fall below pre-pandemic levels, before rising to about 2% in the long run.
• Stripping out inflation expectations, we estimate that the real neutral rate has fallen to a record low of nearly -1% this year and will stay there until 2024, before edging towards 0% at glacial speed.
• While neutral rates can’t be measured with precision, our sensitivity analysis shows how unlikely it is that we’ll see an extended period of high real interest rates.