Higher interest rates could be the new normal despite inflation coming down; what should investors do?

livemint.com:

US Federal Reserve has been raising rates since March 2022, lifting the Federal Funds Rate to a 22-year high. However, this has not cooled the US economy down significantly. Most economists believe the US economy will not see a recession in the near future.

This could shift the "neutral rate of interest" higher than the historical average levels. The neutral interest rate is like the balanced point for an economy's interest rates. It neither pushes growth too hard nor holds it back, leading to stable economic growth and inflation.

Central banks figure out the neutral interest rates by watching how the economy behaves. If borrowing and spending are robust, and inflation is picking up, then the neutral rate is likely higher than the current rate. On the flip side, if things are sluggish and inflation is slowing down, the neutral rate probably leans lower.

As the US economy remains resilient, experts say the policy rates could remain high for a longer period even if there is a fall in inflation. Most major advanced countries' central banks maintained abnormally low policy interest rates since the global financial crisis in 2008 through 2021. But with the surge in inflation in 2022, the situation changed quickly.

Interest rates in most advanced economies are currently near multi-decade highs. Now, even though inflation has eased in many economies, interest rates remain significantly higher than the long-term averages. Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares & Stock Brokers underscored that the recent increase in food grain and crude oil prices, as well as better-than-expected resilience in global GDP growth, raise the danger of global inflation rising higher.