High US interest rates forever: Do not count on this scenario

livemint.com:

In spite of the highest Federal Reserve policy rates in two decades, the US economy grew about 2.5% last year, unemployment remains low and stocks are near all-time highs, leading many observers to conclude that the economy has become less interest-rate sensitive—and probably needs permanently high benchmark rates to prevent overheating. Consider the shift in attitudes in recent months.

For the better part of a decade, market economists generally believed that the longer-run ‘neutral’ Fed policy rate—consistent with low inflation and sustainable growth—was around 2.5%, and that remained the case even after inflation surged in 2021 and 2022. Once inflation had been beaten, economists assumed that policy rates would eventually ‘normalize’ around that 2.5% level.

But in 2023, something snapped and economists’ median views started to drift up. As of the latest survey of primary dealers conducted by the Federal Reserve Bank of New York, the median respondent now sees rates settling at around 3%—a tectonic shift in central bank forecasting.

In options markets, traders are wagering on rates staying at around 4% into at least 2026. Market participants don’t just think rates will stay at their current extremes for longer than previously anticipated; they now also believe that rates may have to stay moderately high forever—a shift that implies far-reaching consequences for housing affordability, corporate finance and the national debt.

But with all the moving parts in the economy today, can economists really know how interest rates will shake out that far in the future? I’d argue that many of these projections miss the particular and fast-changing circumstances of the current moment. Any explanation of the muted impact of rate