Five charts to start your day

The neutral interest rate is rising so the Fed might raise rates in the future

Have you ever heard of the neutral interest rate? If you haven’t that’s fine, let’s explain why this concept is interesting. This is the rate that balances the supply and demand for savings, leading to stable economic growth and inflation.

Traditionally, this rate has been thought to be quite low, especially following the 2008 financial crisis, but there are signs that it might be increasing. The reasons for a potential rise in the neutral rate include higher government deficits and increased investments in areas like green energy and artificial intelligence.

If the neutral rate is indeed rising, it could mean that current interest rates, which are already relatively high, might not be as restrictive as previously thought. This could affect decisions by the Federal Reserve regarding future rate cuts or increases, shaping the overall monetary policy.

Now you can’t directly observe this rate, but you can estimate it. A common way to do this is to look at the five-year Treasury yield, 10-year forward rate. And that’s what this chart shows.

As you can see, it’s rising. So there is in no reason for the Fed to cut rates. There is every reason for the Fed to keep rates on hold. And, there is a possibility the Fed could even raise rates.

Source: Eeagli

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