New York Federal Reserve News Agency: Even if the Federal Reserve cuts interest rates this year, there will not be ultra-low interest rates again

The timing of the Fed's interest rate cuts has been repeatedly speculated, affecting global markets, but another issue that has a more profound impact on asset prices of all kinds is: even if interest rates are cut, where will long-term rates stabilize?

On April 28th, well-known financial journalist Nick Timiraos, also known as the "New Fed News Agency," wrote that amid the growing budget deficit and investment demand, the long-term neutral interest rate may be on the rise. In other words, the Fed may cut interest rates, but the end of the ultra-low interest rate era is inevitable.

The so-called neutral interest rate, also known as the natural rate or equilibrium rate (R*), refers to a monetary policy that neither stimulates nor hinders the economy, maintaining economic growth at a natural production level while keeping the inflation rate stable near the target level.

Various signs indicate that high interest rates may become the new normal for the U.S. economy.

Every quarter, Fed officials make forecasts for long-term interest rates, which can be seen as their expectations for the neutral rate. After the 2008 financial crisis, the Fed continuously lowered its estimates for the neutral rate, with the median forecast dropping from 4.25% in 2012 to 2.5% in 2019. After deducting a 2% inflation rate, the actual neutral interest rate is 0.5%.

By March of this year, the median rose to 0.6%, with 9 out of 18 officials expecting the neutral rate to be above 0.5%. In comparison, two years ago, only two people expected the neutral rate to be above 0.5%.

Dallas Fed President Kaplan warned in a recent speech that failing to recognize the continued rise of the neutral rate could lead to excessively loose monetary policy.

The resilience of the U.S. economy under high interest rates also suggests that the neutral rate may be higher. Last year, when the Fed raised the federal funds rate to 5.3% - the highest level since 2001, the economy did not seem to be significantly affected.

Timiraos quoted Joe Davis, Chief Global Economist at Vanguard, as saying, "Ten years ago, no one could have told me that we would raise rates to this level. With each quarterly data release, our belief in a higher neutral rate is strengthening."

According to Timiraos' analysis, possible factors contributing to the rise in the neutral rate include: soaring government deficits, the transition to green energy, and strong investment demand driven by artificial intelligence. In addition, productivity gains from artificial intelligence may also promote long-term growth and an increase in the neutral rate.

However, there are also doubts about the rise in the neutral rate. Some believe that the continued presence of strong demand does not necessarily mean that the neutral rate has risen, it may simply mean that higher rates have not yet taken effect in the financial system.

New York Fed President Williams, one of the co-authors of the neutral rate R-Star model, believes that global labor force aging will keep savings at a low neutral level.

The neutral rate cannot be directly observed and can only be speculated through the reaction of economic activities to changes in interest rates. The Fed can only take it step by stepFederal Reserve Chairman Powell has stated that the Fed must take action in the absence of a clear understanding of the specific position of the neutral interest rate, "We can only understand it through its effects."

David Mericle, Chief U.S. Economist at Goldman Sachs, stated that interest rates cannot remain at 5% in the long term, but monetary policy normalization will not bring rates down to 2.5%. They may ultimately find a comfortable point between 3% and 4%, which is still unknown.