The US Economy Won’t Be Immune to High Rates Forever
The economy has been largely unresponsive to Fed policy moves, but that doesn’t mean the US will be permanently rate-insensitive.
How high is high enough?
Photographer: Chip Somodevilla/Getty Images
In spite of the highest Federal Reserve policy rates in two decades, the US economy grew about 2.5% last year, unemployment remains low and stocks are near all-time highs, leading many observers to conclude that the economy must have become less interest-rate sensitive — and probably needs permanently high benchmark rates to prevent overheating.
Consider the monumental shift in attitudes in recent months. For the better part of a decade, market economists have generally believed that the longer-run “neutral” Fed policy rate — consistent with low inflation and sustainable growth — was around 2.5%, and that remained the case even after inflation surged in 2021 and 2022. Once inflation had been beaten, economists assumed that policy rates would eventually “normalize” around that 2.5% level. But in 2023, something snapped and economists’ median views started to drift up.