The natural rate of interest, also known as r-star, is a crucial factor in the world of economics. It represents the ideal interest rate that balances savings, investments, and inflation. After a long period of declining interest rates, investors are now realizing that money will remain expensive for an extended period. However, the natural rate of interest is a mysterious concept that is frequently discussed but never truly observed. Despite its elusive nature, it serves as a guiding principle for central bankers, helping them determine when and by how much to adjust interest rates.
Recent analysis from the Financial Times highlights that estimates of the neutral rate, or r*, by the Federal Reserve range from 2.3% to 3.75%, indicating growing uncertainty surrounding this key economic indicator. Bloomberg's previous analysis revealed that the natural interest rate for ten-year US Treasuries has dropped from 5% in 1980 to just under 2% in the past decade. Various factors are expected to push the neutral rate of interest even higher and for a more extended period.
The current economic conditions suggest a shift in investment and savings patterns, with ongoing investments in AI and green technology potentially requiring higher rates. Additionally, deglobalization trends are affecting US asset prices and credit availability, while increased global sovereign debt may lead to lower long-term rates. Demographic changes are complicating predictions for r*, as an aging population could raise the neutral rate, although recent immigration may improve the demographic outlook.
To navigate this environment, investors may consider focusing on solid, profit-making companies rather than speculative, unprofitable growth ones. Infrastructure plays, eco-friendly assets, defense companies, and even bitcoin could be promising investment options. Additionally, holding cash for opportune moments may also be advantageous. [e18abc90][bf32444b]