Question

how would you describe the current level of interest rates relative to the historical pattern? in which direction do you think is most likely for interest rates for the next five years and why?

Answer 1

The current levels of interest rates, relative to the historical pattern, are low, when compared to the trend that was created by the pattern. This is both in real terms as well in inflation adjusted terms. The historical data shows us that interest rate in USA increased during the 1960s and then declined in the 1970s. It then increased in 1980s and then started witnessing a long term decline from late 1980s onwards.

Over the next five years interest rates will be range bound. For the next one year it will be hovering around the lower bound because of the repercussions and disruptions caused by the Covid-19 pandemic. With the falling level of economic activity, rising unemployment rate and uncertainty about when the Corona virus will end the interest rates will be low and might even touch new low levels. Once the havoc caused by Corona virus is over the economy will start picking up and so after a couple of years the interest rates may start moving up, although at a slow speed.