According to recent analysis by researchers at the New York Federal Reserve, a key global interest rate is trending upwards, with a major contributing factor being the diminishing appeal of government bonds as "safe and liquid assets." Researchers Marco Del Negro, Elena Elbarmi, and Michael Pham from the New York Fed stated in a blog post that the metric known as the "natural rate of interest"—the short-term equilibrium rate when the economy is at full capacity and inflation is stable—has shown a statistically significant increase since 2019. In the United States and other advanced economies, this rate has risen by approximately one percentage point.
The researchers noted that while multiple factors are driving the rise in the natural rate, a decrease in investor demand for the safety and liquidity of government bonds may account for as much as half of the increase. This shift is corroborated by the persistent narrowing of corporate bond spreads in the U.S., which they attribute to "a variety of reasons," potentially including the substantial rise in government debt levels across advanced economies.
The natural rate is a theoretical concept but holds significant importance for monetary policy, serving as a crucial benchmark for central banks to assess whether policy rates are restrictive or accommodative. Federal Reserve Chair Jerome Powell once likened the natural rate to a "North Star" for navigators, guiding the direction of monetary policy during a speech at the Jackson Hole symposium in 2018.
The analysis indicates that statistical reviews reveal a clear upward trend in both the U.S. natural rate and its global counterpart following the COVID-19 pandemic. In contrast, from 1990 to 2019, strong investor preference for safety and liquidity pushed government bond yields in advanced economies consistently lower, which also contributed to depressing the natural rate during that period.
Beyond the reduced attractiveness of government bonds, the researchers also suggested that expectations for productivity gains driven by artificial intelligence represent another potential factor pushing the natural rate higher. Furthermore, challenges such as demographic shifts and anticipated increases in military spending may lead to rising debt-to-GDP ratios in some economies, which could also be factored into market interest rate expectations in advance.