NEW YORK, July 26 — By the numbers: about 3 percent in 1995, near zero by 2015. That is the arc of the estimated “natural rate of interest” — known to economists as r-star or r* — as tracked by a key model. Now, a new report from JPMorgan Chase projects that rate is rising again.
The figure that matters for markets and Fed-watchers is whether that rebound is real and durable. Michael Feroli, the chief U.S. economist at JPMorgan Chase, led the team that produced the report.
Feroli, who holds a PhD in economics from the University of Michigan and has been with JPMorgan since 2005, is based in New York. He is a frequent commentator on Federal Reserve policy and the broader economy. The concept of the natural rate of interest dates back more than a century.
Swedish economist Knut Wicksell developed the idea in 1898. It was later refined by John Maynard Keynes and, more recently, by John C.
Williams — now president of the New York Fed — and economist Thomas Laubach. Their Laubach-Williams model estimates r* based on economic growth and other fundamental factors. That model showed r* falling sharply from roughly 3 percent in 1995 to near zero by 2015.
Investors will note that period coincided with sluggish growth, low inflation, and subdued investment across developed economies. JPMorgan’s report uses a different methodology. It projects r* climbing again, though the source material does not give specific new figures for that projection.
The debate’s key players
The bottom line: Where the natural rate lands shapes everything from Fed rate decisions to long-term bond yields. A higher r* means the economy can sustain higher interest rates without braking growth. A lower one suggests rates must stay low to keep the economy moving.
Ben Bernanke, former Federal Reserve chair now at the Brookings Institution, coined the phrase “savings glut” to describe the forces that pushed global interest rates lower. Larry Summers, former Treasury secretary, argued for a condition known as “secular stagnation” — chronic low demand that keeps rates persistently depressed.
By the numbers, the debate remains unresolved. The JPMorgan report, covered by Bloomberg, The Wall Street Journal, and the Financial Times, adds weight to the view that the decades-long slide in the natural rate has reversed. But the Laubach-Williams model’s historical trajectory still looms over any forecast.
The figure that matters next: whether incoming economic data — growth, productivity, demographics — confirms the rise that Feroli’s team projects. If it does, the implications for Fed policy and portfolio strategy are substantial.
If it doesn’t, the secular stagnation camp may yet have the stronger case.
