The widely accepted idea that rates will eventually fall back to pre-pandemic levels is based on economic theories that may turn out to be backward.
It’s frequently argued that once our economy gets past this burst of inflation, interest rates will fall back to their pre-pandemic lows — and perhaps go lower in the future. Central banks, international organizations and pretty much every economic institution seem to be operating under that assumption. But what if it’s wrong?
The thinking is that there’s a “natural interest rate” that controls where the Fed and the market set rates. It reflects the productivity of the economy and the supply and demand for bonds. The theory among the world’s leading financial institutions is that the natural rate has been trending down for the last few decades and a big reason is an aging population.
Continue reading the entire piece here at Bloomberg Opinion
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
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