A surprising pattern behind the trend of long-term interest rates
Economic Commentaries, News New research shows that the declines in interest rates that add up over time to form the trend in interest rates in the United States occur almost exclusively in connection with meetings of the US Federal Reserve (the Fed). In a new Economic Commentary by Hanna Armelius, Stefan Laséen and Stefania Mammos, the authors show that the corresponding result for Sweden is that about half of the trend decline in interest rates in Sweden occurs outside the Fed's meeting days. The authors also show that the relationships change for both the United States and Sweden during the rapid rise in interest rates from 2021 onwards.
In recent decades, the persistent global decline in both nominal and real interest rates has been one of the more prominent macroeconomic trends. There is a broad consensus that this decline is largely due to changes in several structural factors that are beyond the control of monetary policy.
It has now proved to be the case that the declines in interest rates that add up over time to form the trend in interest rates in the United States occur almost exclusively in connection with meetings of the US Federal Reserve (the Fed). This is despite the fact that the Fed only directly controls the short-term nominal interest rate. The research explains that these meetings make investors aware of the long-term level of interest rates.
When the authors of this Economic Commentary broaden the empirical analysis to cover the recent period of rapidly rising interest rates and include small, or smaller, open economies such as Canada, Sweden and Germany, they find that about half of the trend decline in interest rates in these economies occurs outside the Fed's meeting days. The authors also note a change in the correlation after 2021. The rapid rise in interest rates no longer occurs around Fed meetings to the same extent as before 2021. If it is indeed the case that the Fed's guidance is behind the correlation, this may suggest that the higher interest rates of recent years are not associated with a rising long-term trend.
Authors: Hanna Armelius, Stefan Laséen and Stefania Mammos, employed at the Monetary Policy Department.
ECONOMIC COMMENTARIES
Economic Commentaries are brief analyses of issues with relevance for the Riksbank. They may be written by individual members of the Executive Board or by employees at the Riksbank. Employees’ commentaries are approved by their head of department, while Executive Board members are themselves responsible for the content of the commentaries they write.