As we navigate the ever-changing landscape of interest rates, it’s essential to stay informed about the latest developments. A recent article in the WSJ sheds light on the shifting dynamics, particularly concerning the neutral rate of interest, or “r-star.”“For the last 40 years, economists and Fed policymakers steadily revised down their estimates of neutral. This view became embedded in bond yields, mortgage rates, equity prices, and countless other assets. But now, some see reasons for neutral rising, with the potential to change a wide range of asset prices.”
Here are four compelling indicators suggesting a “new normal” and a “higher for longer” scenario in interest rates:
- The Federal Reserve’s commitment to normalization policy, is exemplified by the simultaneous hiking of the Fed Funds Rate and shrinking of its balance sheet.
- The resilience of the economy throughout the tightening cycle, despite a 5.3% federal funds rate—the highest since 2001.
- Persistent inflation, as evidenced by CPI and PCE metrics exceeding forecasts and the Fed’s 2.0% target.
- Record-high government deficits, leading to an excess supply of bonds flooding the market and exerting upward pressure on rates.
While this narrative unfolds, it’s crucial not to overlook fundamentals. Navigating this complex marketplace alone can be daunting. Our expertise lies in securing lower interest rates and more advantageous loan terms for our clients. Let’s discuss how we can tailor a solution to meet your specific needs.