Expectations of when the Federal Reserve will cut interest rates have been pushed back and forth, affecting global market nerves, but another question that has a more profound impact on the prices of various types of assets is: even if interest rates are cut, where will long-term interest rates stabilize?

On April 28, Nick Timiraos, a well-known financial journalist known as the “New Federal Reserve News Agency,” wrote that under the reality of growing budget deficits and investment demand, long-term neutral interest rates may be on the rise. In other words, the Federal Reserve may cut interest rates, but the end of the era of ultra-low interest rates is a foregone conclusion.

The so-called neutral interest rate, also known as natural interest rate or equilibrium interest rate (R*), means that monetary policy will neither stimulate the economy nor slow down the economy; it can not only keep economic growth stable at a natural level of production, but also stabilize the inflation rate near the target level.

Various indications suggest that high interest rates may become the new normal for the US economy in the future.

Every quarter, Federal Reserve officials forecast long-term interest rates, which can be seen as their expectations for neutral interest rates. After the 2008 financial crisis, the Federal Reserve continued to lower its estimate of the neutral interest rate. The median forecast was to drop from 4.25% in 2012 to 2.5% in 2019. After deducting the 2% inflation rate, the actual neutral interest rate was 0.5%.

By March of this year, the median had climbed to 0.6%, and 9 out of 18 officials expected a neutral interest rate of 0.5% or more. Compared to two years ago, only 2 people expected a neutral interest rate of 0.5% or more.

Dallas Federal Reserve Chairman Logan warned in a recent speech that failure to recognize that a continued rise in neutral interest rates could lead to excessive monetary policy easing.

The resilience of the US economy under high interest rates also means that neutral interest rates are likely to be higher. Last year, when the Federal Reserve raised the federal funds rate to 5.3% — the highest level since 2001, the economy didn't seem to be greatly affected.

Timiraos quoted Pioneer Group's chief global economist Joe Davis as saying, “Ten years ago, no one could have told me we would raise interest rates to this level. As quarterly data is released, our belief in higher performance rates is growing.”

According to Timiraos analysis, possible factors for rising neutral interest rates include surging government deficits, green energy transition, and strong investment demand driven by artificial intelligence. Furthermore, productivity gains brought about by artificial intelligence may also promote long-term growth and increases in neutral interest rates.

However, there are also opinions that are skeptical about the rise in neutral values. Some believe that the continuation of strong demand does not necessarily mean that neutrality has increased; it may simply mean that higher interest rates have yet to play a role in the financial system.

Williams, president of the New York Federal Reserve and one of the co-authors of the neutral interest rate R-Star model, believes that an aging global workforce will drive savings to remain at a neutral low level.

Neutral interest rates cannot be directly observed; they can only be speculated through the reaction of economic activity to changes in interest rates. What the Federal Reserve can do is look at it step by step.

Federal Reserve Chairman Powell once said that the Federal Reserve must act without fully determining the exact location of the neutral interest rate. “We can only understand it through its impact.”

David Mericle, chief US economist at Goldman Sachs, said that interest rates are unlikely to remain at 5% for a long time, but the normalization of monetary policy will not reduce interest rates to 2.5%. It is still unknown that they may eventually find a comfort point between 3% and 4%.