WASHINGTON/LONDON - With key central banks now aligned in cutting interest rates a real-time experiment is underway in how much the global financial landscape has changed since the pandemic and in particular whether the easing cycle may be short-lived because of higher underlying rates.
Officials in Washington, Frankfurt and London are skeptical they can specify that "neutral" rate of interest other than by seeing how economic conditions evolve as rates fall, a tricky exercise likely involving instinct and intuition as much as math and modeling. "That's so far away now, my own sense is that we're not going back to that," Powell said. "It feels to me that the neutral rate is probably significantly higher than it was back then. How high is it? I just don't think we know...We only know it by its works."
Fed Governor Michelle Bowman in particular argues the neutral rate is "much higher than it was" and the Fed therefore closer than suspected to its theoretical stopping point.How data and the debate around it play out in coming months will be central to a global resetting of what it will cost to borrow to finance a home, buy a car or build a business. In the U.S.
In August, after the BoE cut rates to 5.0% for the first time since 2020 from their 16-year high of 5.25%, BoE Governor Andrew Bailey, like Powell, said the level of low rates was likely over.