Opinion, Markets Insight: Today’s ultra-low interest rates are anything but ‘natural’
Financial Times Opinion Piece
You often hear the claim that central banks must follow the natural rate downwards to avoid imposing interest rates that are too high to support normal economic growth. However, the models used for measuring the natural rate rely on macroeconomic variables such as output gaps — which in turn depend on interest rates. This interdependence between interest rates and output makes it hard to account for rates being suppressed below the natural rates for decades...
...there is nothing natural about the fall in rates that we have seen in much of the developed world since the 1980s. The US, for one, has seen rate cuts with each crisis since the stock market crash of October 1987.
Between crises, rates have been raised a little, before being slashed again to new lows. This pattern appears to follow a political imperative of avoiding market downturns and recessions. That is anything but natural.