U.S. interest rates may remain high forever! Five major factors imply that interest rates will not go back

The media pointed out that if the financial market’s judgment is correct, interest rates in the United States will not only remain high this year, but may even remain high permanently.
The return of inflation means ultra-low interest rates are a thing of the past.
Economists say that even after taking inflation into account, the neutral interest rate for the long-term equilibrium economy is rising. This trend is currently reflected in the market.
Traders believe that U.S. interest rates will stabilize at about 4% by the end of this decade, well above policymakers\’ long-term expectations of 2.6%.
Interest rates in the Eurozone are expected to remain around 2.5%. This level exceeds the interest rate levels during most periods in the EU\’s history.
Here are five key factors that determine long-term interest rates: Government spending Huge investments, whether to combat climate change or military needs, and rising interest costs will keep U.S. government debt high.
Economists dispute the impact of rising debt. But some expect spending needs to push interest rates higher.
According to estimates by the International Monetary Fund (IMF), the budget deficit of advanced economies will account for 5.6% of output in 2023, which is almost twice the 3% in 2019. It will remain at a high of 3.6% in 2029.
Ed Hutchings, head of rates at Aviva Investors, said higher deficits would increase the premium investors require to hold government bonds.
But productivity growth is slowing. Potential growth rates in Europe and the United States are thought to be suppressed. Economists believe these factors will dampen investment.
That would suggest the neutral policy rate won\’t increase too much, said Idanna Appio, a former Fed economist and portfolio manager at First Eagle Investment Management.
Higher consumer demand is seen as a key factor that will put upward pressure on interest rates. Aging population. Dhar, a former Bank of England economist and Invesco Investments, said that demographic structure is one of the biggest uncertainties affecting long-term interest rates.
The market consensus is that the excess savings caused by the accumulation of savings by middle-aged and elderly people in rich countries before retirement has driven down interest rates.
This situation is likely to continue. The United Nations predicts that by 2050, 16% of the global population will be over 65 years old. In 2022, this proportion will be 10%.
Europe will especially feel the impact of this change.
But the ratio of dependents (including retirees) to workers is rising.
Economists Charles Goodhart and Manoj Pradhan believe this will reduce savings through age-related expenses, thereby pushing interest rates higher.
Borrowing to fill pension gaps will also put upward pressure on interest rates, Nomura Securities said.
Dependency ratio rising this century Climate warming Assessing the economic impact of climate change is another major challenge.
Isabel Schnabel of the European Central Bank said that the green transition requires large-scale investment, which may push up interest rates. The scale is comparable to the reconstruction of Europe after World War II.
The physical effects of climate change may also trigger higher inflation and price volatility.
But according to a paper by the European Central Bank, they could reduce global output by up to 17% by 2050.
This damage threatens productivity and could lead to a reduction in the neutral interest rate.
The IMF said that more expensive clean energy may eventually reduce investment demand and thus lower interest rates.
Soeren Radde, head of European economic research at hedge fund Point72, called the impact of climate change on interest rates a major open debate.
We face negative shocks that destroy demand.
It\’s unclear whether this will raise the neutral rate, he said.
Green transformation requires huge investment Artificial intelligence boom The extent to which technological revolution can improve productivity and interest rates is a hotly debated topic.
Goldman Sachs estimates that AI-driven productivity gains could increase U.S. economic growth by 0.4 percentage points by 2034 and other advanced economies by 0.3 percentage points.
It foresees upward pressure on interest rates, especially if AI adoption is concentrated early on.
Vanguard Group believes that if the impact of AI is comparable to that of electricity, growth will offset demographic pressure.
But if it\’s similar to computers and the internet… it can be disappointing.
AI may boost productivity. New reality. The COVID-19 epidemic, the Russia-Ukraine conflict, the Palestinian-Israeli conflict, and the trade tensions in the United States all indicate rising supply chain risks in the future.
Point 72\’s Radde said: If the Fed has to react to this… on average, it could also push interest rates higher.
In addition, friend-shoring, the practice of Western countries and their companies seeking more trade with allies, could also lead to higher interest rates.
Roman Gaiser, director of fixed income at Columbia Threadneedle, said: Essentially, any shift in production that is not based on the lowest cost considerations will exacerbate inflation.
For example, Mexico has now become the largest source of imports to the United States.