Why the Price of Money Surged in the Last Six Years
episodePreviously titled “Why the Price of Money Surged in the Last 6 Years” — renamed by the publisher on Aug 3, 2026
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What is the neutral (natural) rate of interest and why does it matter?
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Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway.
And I'm Joe Weisenthal.
Joe.
Yeah, yes.
Recently, recently, Steven Myron, who is chair of the Council of Economic Advisors and also the newly confirmed Fed board member, he made his first public speech since joining the central bank. And do you know what it was about?
I do, but go on.
The neutral rate. The natural rate of interest. R Star.
Yes.
Basically all about R Star, which is like pretty significant for his first speech.
I mean, to me, and this has come up on a bunch of episodes lately. To me, this is the multi trillion dollar question, which is we're recording this September twenty-fourth, twenty twenty five. Why are long term rates so much higher? Why does the market perceive that rates will have to be so much higher in order for the Fed to hit its inflation goals uh than the market perceived in twenty nineteen? What changed in the last six years or five years or whatever?
Well, also, I mean, R Star has always been something of a controversial idea and people criticize it for being this unobservable thing and you know, it's a hypothetical estimate that's extracted from all this different stuff like savings and spending and productivity and demographics, investment. You can go on and on and on.
Climate, immigration. Yeah, exactly.
But I think, you know, our star is probably going to get even more controversial or perhaps more under the spotlight is a way of putting it, given that people like Myron in his speech where he was arguing that the natural rate of interest should be zero right now, which is very, very different than other sort of normal estimates out there, which has the natural rate of interest at like 3.3% or 3.9%, something like that. And so if you think the neutral rate of interest is a lot lower. then you would assume that the Fed should be loosening more. And conversely, if you think our star is high, which a lot of people have argued in recent years, then you would uh argue that interest rates don't look that restrictive at the moment.
Totally. So we should clearly talk more about this. And we've actually never done a specific episode just on the neutral rate.
So I'll just say two things. I'm probably something of an R star truther in the specific sense that I doubt, like, okay, everyone agrees it's like quote unobservable, et cetera. But I doubt that there is actually some rate that will magically bring the economy into balance if we knew what it was. That doesn't mean I don't find this to be a conceptually useful conversation.
And yet you don't believe in the term premium.
I don't really believe in any any of this stuff. No, that's not true. I am very interested in setting aside whether something could theoretically be observed, whether one number could bring everything into balance, all of these things, setting aside that question. Something has changed in the underlying economy. If you want to call that a neutral rate of interest, I guess I'm totally fine with that. But something's changed, and I wanna know what it is.
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Chapters
8 chapters
1
What is the neutral (natural) rate of interest and why does it matter?
0:00–5:13
2
Why have long‑term interest rates risen dramatically since 2019?
5:13–11:17
3
Which economic forces (demographics, debt, de‑globalization, data‑centers, defense spending) are driving the higher neutral rate?
11:17–17:47
4
How did the pandemic‑era borrowing boom affect the price of money?
17:47–24:09
5
What does the new Bloomberg Economics book reveal about estimating the neutral rate?
24:09–31:19
6
How is AI investment reshaping the cost of borrowing and asset prices?
31:19–38:15
7
What impact does de‑dollarization and reduced foreign demand for U.S. Treasuries have on the neutral rate?
38:15–42:29
8
What are the implications for future Fed policy and global borrowing costs?
42:29–45:56
Speakers
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