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IS THE ECONOMY
STUCK IN
NEUTRAL?
ere's a low demand for capital
investment due to many factors, which has,
more or less, neutralized some parts of the
economy. In fact, the neutral rate of interest
is at a historic low, and it doesn't look like it
will increase any time soon, that's according
to First American Chief Economist Odeta
Kushi.
Welcome to the lowest neutral rate of
interest in years, a statement and status most
might find confusing. But according to First
American, this 60-year low may prove that
the economy may be stuck in neutral for a
while.
What exactly is a neutral rate of interest?
Kushi explains that when the economy is
at full employment and enjoying stable
inflation, it's the short-term interest rate that
would be the standard. e Federal Reserve
may then choose to cool the economy by
setting benchmark federal funds rates above
the neutral rate of interest or stimulate the
economy by setting rates below it.
Since the financial crisis of 2009, the
neutral rate of interest has been below
the federal funds rate. And currently, this
phenomenon isn't exclusive to the United
States. Other advanced economies like
Canada and the United Kingdom are
experiencing similar economic activity.
is may be due in part to the world
old-age dependency ratio, which measures
how much of the population has aged out of
the workforce. ese individuals reduce the
output of the economy. With fewer workers
to supply with capital investment, there's less
demand for new investment, and this pushes
the neutral rate of interest down. In addition,
if this aging population has money saved for
retirement, they've increased the supply of
savings, which also drives down the neutral
rate of interest. In 2019, the U.S. old-age
dependency ratio reached 25%.
