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The end of zero interest rates

By Jeffrey Frankel

11 Aug 2023 · 4 min read

informed Summary

  1. In 2021, the consensus was that interest rates would remain low indefinitely, with real interest rates being negative and projected to stay that way. However, the US Federal Reserve and other central banks' aggressive monetary tightening led to real interest rates moving into positive territory by late 2022.

CAMBRIDGE – What a difference two years make. In 2021, when interest rates were near zero in the United States and the United Kingdom and slightly negative in the eurozone and Japan, the consensus was that they would remain low indefinitely. Astonishingly, as recently as January 2022, investors put the probability of rates in the US, eurozone, and the UK rising above 4% within five years at only 12%, 4%, and 7%, respectively. After adjusting for expected inflation, real interest rates were negative and projected to stay that way.

In fact, despite the US Federal Reserve and other central banks’ aggressive monetary tightening, real interest rates remained significantly negative until late 2022. Moreover, long-term rates increased more moderately than short-term rates: by October 2022, the yield curve had inverted, signaling that financial markets were expecting central banks to reduce short-term rates in the near future. This sentiment stemmed from the widespread expectation that both the US and global economies would enter recession.

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