Summary

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.

Hillenbrand (2023) has now made an unexpected discovery. It is namely the case that the declines in interest rates that add up over time to form the trend 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. Hillenbrand’s explanation is that investors become aware of the long-term level of interest rates in connection with these meetings.

In this Economic Commentary^[1] Economic Commentaries are brief analyses of issues that are relevant to the Riksbank. They can 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 their Commentaries. , we extend Hillenbrand's empirical analysis to include small open economies such as Canada, Sweden and Germany. We also include the most recent period with rapidly rising interest rates.

We find that around half of the trend decline in interest rates in these economies occurs outside the Fed's meeting days. We further note a change in the pattern after 2021, also with regard to the United States. 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 pattern, this may suggest that the higher interest rates of recent years are not associated with a rising long-term trend.

Published: 23 April 2024