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.
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