What is the new normal for interest rates?

September 2024

In 2022, monetary policy rates were raised from historic lows to combat inflation risks not seen since the 1970s.

This has subsequently sparked debate on whether interest rates will return to pre-pandemic levels or remain elevated going forward. Many argue that secular forces entrenched in the global economy, like low potential growth, will drive yields lower, while many others suggest yields could remain higher amidst current economic resilience, the trend toward deglobalization, the transition to clean energy, and increased government debt levels.

Embedded in this debate of higher or lower interest rates is the concept of the neutral rate of interest. In this brief update, we first define the neutral interest rate and provide a quick review of its history and some popular models that seek to measure it. We then focus on current estimates, drivers, and the implications for monetary policy, fiscal policy, and institutional portfolios.