Even if the Fed cuts, the days of ultralow rates are over

livemint.com:

Amid the debate over whether and when the Federal Reserve cuts interest rates, another important argument is unfolding: where do rates settle in the long run? At issue is the neutral rate of interest: the rate that keeps the demand and supply of savings in equilibrium, leading to stable economic growth and inflation. For the last 40 years, and especially following the 2008 financial crisis, 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. The neutral rate, sometimes called “r*" or “r-star," can’t be directly observed, only inferred. Five years ago, after the Fed raised its benchmark federal-funds rate rate to 2.4%, officials saw signs of feeble growth and inflation and began lowering rates—implying neutral must have been around that level, or lower.

But when the Fed raised the fed-funds rates to 5.3% last year, the highest since 2001, the economy appeared to shrug it off, giving reason to think neutral might be higher. “The economy has weathered this exceptionally well. No one could have told me 10 years ago we would have raised rates to this level with this outcome," said Joe Davis, chief global economist at Vanguard.