Following decades of secular decline, many estimates of r*—the natural or steady-state short-term real interest rate that would prevail in the absence of transitory disturbances—have risen roughly 1 percentage point since 2020 in the U.S. Estimates of r* are one way the Federal Reserve gauges whether its short-term interest rate target is stimulative or restrictive; the estimates are also key to assessing the sustainability of the U.S. federal debt.
The most prominent explanations for the recent rise in r* attribute this reversal to heightened expectations of rising government debt and faster productivity growth from artificial intelligence (AI). However, this high-frequency event study finds that news about fiscal and AI developments does not explain this increase. U.S. fiscal policy news shocks during the first half of this decade appear to have provided only a modest upward lift to the natural rate. At the same time, news surrounding major generative AI model releases is associated with an overall decline in measures of r*. Furthermore, contrary to earlier evidence that persistent shifts in longer-term yields occurred around monetary policy meetings, the authors find that monetary policy news does not account for the recent rise in r*.
There appears to be a significant force pushing the natural rate higher that more than offsets the downward contributions from AI and monetary developments, as well as demographic and other factors.
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