Shocks, Crises, and False Alarms

CHAPTER 14 Higher but Healthy Interest Rates

In January 2020, a well-circulated paper argued that real interest rates were on a 700-year downtrend and destined for negative territory, as shown in figure 14.1.¹ To be sure, shards of data from Renaissance money lenders would seem a doubtful basis for predicting rates in the 21st century. But after a decade of ultralow, sometimes even negative real rates, the analysis resonated with many—even more so when Covid hit and falling rates appeared to confirm the trend. The 700-year destiny offered a compelling lower-forever narrative for that most critical of markets: money, and its price (the interest rate).

Only, interest rates have not followed that script since. Accompanying the Fed’s inflation-fighting ...