Why the Price of Money Surged in the Last 6 Years

Bloomberg economists Jamie Rush and Tom Orlik assert that the neutral rate of interest has significantly increased over the past six years, fundamentally altering the economic landscape. This upward shift in the 'price of money' makes a return to zero interest rate policy (ZIRP) unlikely and suggests future rate cut cycles will be shallow. Key drivers for this surge include structural changes such as deglobalization, evolving demographics, and the growing demand from data centers.

Analysis

Why the Price of Money Surged in the Last 6 Years Discovering the true neutral rate Listen to Odd Lots on Apple Podcasts Listen to Odd Lots on Spotify Subscribe to the newsletter What changed between 2019 and 2025? Why are interest rates so much higher? Why does it seem virtually unfathomable that the Fed will return to ZIRP anytime soon? Why do investors expect this rate cut cycle to be so shallow? The answer, theoretically, is that the neutral rate of interest has gone up. But what is the neutral rate of interest, and why has it moved? On this episode, we speak with Jamie Rush of Bloomberg Economics and Tom Orlik, the Chief Economist at Bloomberg Economics. They, along with Bloomberg's Stephanie Flanders, are the editors of a new book titled The Price of Money: A Guide to the Past, Present, and Future of the Natural Rate of Interest, in which they attempt to directly identify what the neutral rate of interest actually is. We discuss the big changes over the last several years, including deglobalization, demographics, and datacenters, that are pushing this number higher. Bloomberg economists Jamie Rush and Tom Orlik posit that the neutral rate of interest has seen a substantial increase over the past six years, fundamentally reshaping the monetary policy landscape. This structural shift implies that a return to a Zero Interest Rate Policy (ZIRP) is highly improbable, and future rate cutting cycles are expected to be significantly shallower than historical patterns. The market impact of this conceptual change is assessed as moderately high, indicating its importance for investor strategies. The economists identify key macroeconomic factors contributing to this upward trajectory of the neutral rate. These include broad trends such as deglobalization, which is altering international trade and capital flows, evolving demographic profiles impacting labor supply and demand, and the escalating demand from data centers, signaling significant capital expenditure and technological shifts. These factors are considered persistent, suggesting a sustained higher "price of money." A persistently higher neutral rate has direct implications for central bank policy and investor expectations. It suggests that the Federal Reserve will maintain a higher baseline for interest rates, requiring investors to adjust valuation models and discount rates accordingly. This outlook challenges previous assumptions about long-term monetary easing and necessitates a recalibration of investment strategies across various asset classes.

Key Decisions for Investors

• Investors should reassess their long-term portfolio assumptions, particularly regarding discount rates and asset valuations, given the expectation of a structurally higher neutral interest rate.
• Pay close attention to sectors disproportionately affected by the identified drivers—deglobalization (e.g., supply chain-dependent businesses), demographics (e.g., healthcare, real estate), and data centers (e.g., technology infrastructure, utilities)—for shifts in growth and profitability.
• Consider adjusting fixed income strategies to account for potentially shallower rate cut cycles and a sustained higher interest rate environment, focusing on duration management and yield curve positioning.