For decades, policymakers treated the so-called neutral rate of interest — the level that neither stimulates nor restrains the economy — as a slowly drifting anchor that mostly moved in one direction: down. A growing group of economists now argues the anchor has dragged, and that the neutral rate sits meaningfully higher than it did before the pandemic.
The debate sounds technical, but its consequences are not. If neutral is higher, then interest rates that look restrictive on paper are closer to normal in practice, and borrowing costs for households, companies and governments may settle well above the levels a generation of investors grew up with.