Why Interest Rates Are Not Going Back to Zero

April 06, 2023

by Charles Hugh Smith Of Two Minds

In a system maintained by ever-greater extremes, confidence erodes very quickly once the next extreme fails to move the needle.

Many observers expect interest rates to fall back to zero as inflation dissipates and central banks rush to stimulate flagging economies. This expectation is reasonable based on the events of the past 15 years (2008-2023), but if we zoom out to a 50-year timeline, we get a different perspective and draw a different conclusion.

2023 is not 2008, and the difference can be summed up in one phrase: global risk has been repriced. Interest rates reflect not just inflation expectations and central bank stimulus; interest rates and bond yields also reflect the risk premium on the cost of credit-money, and if the risk profile has changed in fundamental ways, the risk premium and cost of credit-money will reflect that, regardless of inflation and central bank stimulus.