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."
For the Fed, in projections issued last week the median stopping point for rate cuts seen by officials was 2.9%, to be reached by the end of 2026. But individual projections were spread across a range from 2.4% to as high as 3.9%. The BoE doesn't publish a precise estimate for what it thinks neutral might be. But the bank's most recent Market Participants Survey showed analysts saw it at 3.5%.
Those factors, along with demographic, productivity, and other underlying trends likely mean more intense price pressures and higher interest rates going forward, Jason Thomas, head of global research and investment for Carlyle, wrote in a recent analysis.