Latest thoughts on r* and where rates end this cycle

In detailed analysis last year, we concluded that equilibrium nominal interest rates would settle at between 3% and 4% in advanced economies in the next ten years. We maintain that opinion and in fact some of the forces boosting equilibrium rates seem to be taking effect sooner than we had anticipated. We see interest rates settling at 2.5% in the euro-zone and 3.25% in the US after cutting cycles have ended next year and anticipate that long-run rates will drift up again in the late 2020s/early 2030s.

In light of Jerome Powell’s comments Wednesday about the neutral rate being “significantly higher”, we’re resending this recent Global Economics analysis updating our 2023 project about r* and interest rates in the post-pandemic age.