Viewing offline content

Limited functionality available

Dismiss
United States
  • Services

    What's New

    • Register for Dbriefs webcasts

    • Unlimited Reality™

      Metaverse solutions that drive value

    • Sustainability, Climate & Equity

      Cultivating a sustainable and prosperous future

    • Tax

      • Tax Operate
      • Tax Legislation
      • Tax Technology Consulting
      • Mobility and Payroll
      • Legal Business Services
      • Tax Services
    • Consulting

      • Core Business Operations
      • Customer & Marketing
      • Enterprise Technology & Performance
      • Human Capital
      • Strategy & Analytics
    • Audit & Assurance

      • Audit Innovation
      • Accounting Standards
      • Accounting Events & Transactions
    • Deloitte Private

    • M&A and Restructuring

    • Risk & Financial Advisory

      • Accounting & Internal Controls
      • Cyber & Strategic Risk
      • Regulatory & Legal
      • Transactions and M&A
    • AI & Analytics

    • Cloud

    • Diversity, Equity & Inclusion

  • Industries

    What's New

    • The Ripple Effect

      Real-world client stories of purpose and impact

    • Register for Dbriefs webcasts

    • Industry Outlooks

      Key opportunities, trends, and challenges

    • Consumer

      • Automotive
      • Consumer Products
      • Retail, Wholesale & Distribution
      • Transportation, Hospitality & Services
    • Energy, Resources & Industrials

      • Industrial Products & Construction
      • Power, Utilities & Renewables
      • Energy & Chemicals
      • Mining & Metals
    • Financial Services

      • Banking & Capital Markets
      • Insurance
      • Investment Management
      • Real Estate
    • Government & Public Services

      • Defense, Security & Justice
      • Federal health
      • Civil
      • State & Local
      • Higher Education
    • Life Sciences & Health Care

      • Health Care
      • Life Sciences
    • Technology, Media & Telecommunications

      • Technology
      • Telecommunications, Media & Entertainment
  • Insights

    Deloitte Insights

    What's New

    • Deloitte Insights Magazine

      Explore the latest issue now

    • Deloitte Insights app

      Go straight to smart with daily updates on your mobile device

    • Weekly economic update

      See what's happening this week and the impact on your business

    • Strategy

      • Business Strategy & Growth
      • Digital Transformation
      • Governance & Board
      • Innovation
      • Marketing & Sales
      • Private Enterprise
    • Economy & Society

      • Economy
      • Environmental, Social, & Governance
      • Health Equity
      • Trust
      • Mobility
    • Organization

      • Operations
      • Finance & Tax
      • Risk & Regulation
      • Supply Chain
      • Smart Manufacturing
    • People

      • Leadership
      • Talent & Work
      • Diversity, Equity, & Inclusion
    • Technology

      • Data & Analytics
      • Emerging Technologies
      • Technology Management
    • Industries

      • Consumer
      • Energy, Resources, & Industrials
      • Financial Services
      • Government & Public Services
      • Life Sciences & Health Care
      • Technology, Media, & Telecommunications
    • Spotlight

      • Deloitte Insights Magazine
      • Press Room Podcasts
      • Weekly Economic Update
      • COVID-19
      • Resilience
      • Top 10 reading guide
  • Careers

    What's New

    • Our Purpose

      Exceptional organizations are led by a purpose. At Deloitte, our purpose is to make an impact that matters by creating trust and confidence in a more equitable society.

    • Day in the Life: Our hybrid workplace model

      See how we connect, collaborate, and drive impact across various locations.

    • The Deloitte University Experience

      Explore Deloitte University like never before through a cinematic movie trailer and films of popular locations throughout Deloitte University.

    • Careers

      • Audit & Assurance
      • Consulting
      • Risk & Financial Advisory
      • Tax
      • Internal Services
      • US Delivery Center
    • Students

      • Undergraduate
      • Advanced Degree
      • Internships
    • Experienced Professionals

      • Additional Opportunities
      • Veterans
      • Industries
      • Executives
    • Job Search

      • Entry Level Jobs
      • Experienced Professional Jobs
      • Recruiting Tips
      • Explore Your Fit
      • Labor Condition Applications
    • Life at Deloitte

      • Life at Deloitte Blog
      • Meet Our People
      • Diversity, Equity, & Inclusion
      • Corporate Citizenship
      • Leadership Development
      • Empowered Well-Being
      • Deloitte University
    • Alumni Relations

      • Update Your Information
      • Events
      • Career Development Support
      • Marketplace Jobs Dashboard
      • Alumni Resources
  • US-EN Location: United States-English  
  • Contact us
  • US-EN Location: United States-English  
  • Contact us
    • Dashboard
    • Saved items
    • Content feed
    • Subscriptions
    • Profile/Interests
    • Account settings

Welcome back

Still not a member? Join My Deloitte

Falling interest rates: Puzzles keeping economists awake at night

by Daniel Bachman
  • Save for later
  • Share
    • Share on Facebook
    • Share on Twitter
    • Share on Linkedin
    • Share by email
Deloitte Insights
  • Strategy
    Strategy
    Strategy
    • Business Strategy & Growth
    • Digital Transformation
    • Governance & Board
    • Innovation
    • Marketing & Sales
    • Private Enterprise
  • Economy & Society
    Economy & Society
    Economy & Society
    • Economy
    • Environmental, Social, & Governance
    • Health Equity
    • Trust
    • Mobility
  • Organization
    Organization
    Organization
    • Operations
    • Finance & Tax
    • Risk & Regulation
    • Supply Chain
    • Smart Manufacturing
  • People
    People
    People
    • Leadership
    • Talent & Work
    • Diversity, Equity, & Inclusion
  • Technology
    Technology
    Technology
    • Data & Analytics
    • Emerging Technologies
    • Technology Management
  • Industries
    Industries
    Industries
    • Consumer
    • Energy, Resources, & Industrials
    • Financial Services
    • Government & Public Services
    • Life Sciences & Health Care
    • Tech, Media, & Telecom
  • Spotlight
    Spotlight
    Spotlight
    • Deloitte Insights Magazine
    • Press Room Podcasts
    • Weekly Economic Update
    • COVID-19
    • Resilience
    • Top 10 reading guide
    • US-EN Location: United States-English  
    • Contact us
      • Dashboard
      • Saved items
      • Content feed
      • Subscriptions
      • Profile/Interests
      • Account settings
    4 minute read 29 October 2019

    Falling interest rates: Puzzles keeping economists awake at night Economics Spotlight, October 2019

    4 minute read 30 October 2019
    • Daniel Bachman United States
    • Save for later
    • Share
      • Share on Facebook
      • Share on Twitter
      • Share on Linkedin
      • Share by email
    • US interest rates have been hitting new lows...
    • Low interest rates are a global phenomenon
    • Why are interest rates falling?

    ​Long-term US interest rates are at an all-time low. While that may be troubling news by itself, there’s also the fact that investment is not picking up—and that similar trends are apparent globally. Such a long-term trend could mean a low-growth scenario worldwide.

    We may be used to being dismal, but even economists find some phenomena particularly disturbing. What sign in the economy is most troublesome? It’s not whether the Federal Reserve will raise or lower interest rates by a small amount at the next meeting. It’s not even the reversal of the yield spread, even though such reversals do tend to precede recessions. But a recession, bad as it might be, is just an interruption in the long-term growth of the economy.

    Interest rates, however, are a different story.

    Learn more

    Explore the Economics Spotlight collection

    Subscribe to receive related content

    Download the Deloitte Insights and Dow Jones app

    US interest rates have been hitting new lows—and, yet, investment is slowing

    Long-term interest rates indicate a disturbing pattern. Figure 1 shows the real yield on 10-year Treasury bonds. In the first half of the 1960s, the real rate of interest held steady at around 2.5 percent. It fell in the latter part of that decade and remained low (except for a spike up in the early 1970s reflecting tight monetary policy). Both oil shocks coincided with temporary declines in the real interest rate as inflation picked up unexpectedly. Then, in the early 1980s, the Volcker monetary tightening took real interest rates up to very high levels for a time. Despite a drop in the latter half of the 1980s, they remained at a still high 4.0 percent.1

    Real yield on 10-year Treasury bonds

    But then the real interest rate kept falling: first, to around 3.6 percent in the 1990s, then to around 1.8 percent in the aughts, and then averaged below 1 percent as the Fed created new methods of monetary accommodation after the global financial crisis in the 2010s. But, even as the US economy approached full employment, and even after the Fed tried to tighten financial conditions, the real rate remained low. The real rate between 2011 and today has averaged just 0.4 percent. In August and September 2019, it turned negative—something that, in the past, only occurred when inflation shocks caught financial markets by surprise (for example, during the 1974 and 1980 oil price shocks).

    Most economists would expect such low interest rates to encourage investment. But that didn’t happen. Figure 2 shows that investment growth has ratcheted down with each recovery. The current recovery has seen investment growing at just over half the rate of the 1995–2001 period, despite substantially lower interest rates.

    Real fixed nonresidential investment

    Low interest rates are a global phenomenon

    This phenomenon, however, is not limited only to the United States—interest rates in other major global investment destinations have also fallen over the past 20 years (see figure 3). In fact, interest rates in the United States are relatively high. Most of the rest of the developed world has experienced negative real interest rates for the past year or two—in Japan’s case, even longer. These negative real rates are quite different from the negative real rates recorded in the 1970s. Then, the problem was that financial markets were taken by surprise by high inflation. Negative real interest rates were not a planned outcome. There is some question about whether investors really understood that they were taking losses at what appeared to be high nominal interest rates. Eventually, investors learned to price future inflation into asset prices, and real interest rates returned to “reasonable” levels.

    Real interest rates in global investment destinations

    Today, inflation is low. There are no resource price shocks, and investors are not being fooled by high nominal rates. In European countries where nominal rates have gone negative, lenders know very well that they are paying borrowers to borrow. It may be crazy, but they are doing so anyway.

    Why are interest rates falling?

    The decline in real interest rates over a long period of time is a puzzle for economists. Likely explanations include:2

    • Trend productivity growth has slowed, making capital investment less productive. In equilibrium, the interest rate should be related to the return on capital, so lower capital returns would lead to lower long-term interest rates.
    • There is a global savings surplus, as certain economies (China and Germany are the most cited) have oriented their economies toward exports and high savings levels. Global investment demand is not large enough to absorb the global savings surplus, so the return on savings (the interest rate) has fallen.
    • The aging population saves more and has less demand for capital-intensive consumer products. The combination of low savings and less need for capital has pushed down interest rates.
    • Low expected inflation means that the term “premium” (essentially, the expected change in short-term rates) is lower than it was in the past. We often compare current interest rates to averages over the past—but if inflation expectations are very different today, those past averages may be misleading.

    While economists love puzzles, this one is disturbing. It suggests that monetary policy may be in the process of becoming less effective, and that maintaining full employment could become more challenging in the future. The potential “Japanification” of the global economy would see the entire world stuck in a low-growth equilibrium with few policy options to alleviate the experience of slow income growth—and worse, few tools ready to help fight economic downturns.

    Acknowledgments

    Cover image by: Tushar Barman

    Endnotes
      1. All data, unless specified otherwise, has been taken from Haver Analytics. View in article

      2. A complete survey of possible explanations, including relevant economic theory, can be found in Obama White House, Long-term interest rates: A survey, July 2015. View in article

    Show moreShow less

    Topics in this article

    Americas Economics , Economics , Behind the Numbers , United States (U.S.) , Americas

    Deloitte Global Economist Network

    The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The Network’s industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

    Learn more
    Get in touch
    Contact
    • Dr. Daniel Bachman
    • Senior manager
    • Deloitte Services LP
    • dbachman@deloitte.com
    • +1 202 306 5576

    Download Subscribe

    Related content

    img Trending

    The changing balance of trade

    Article 3 years ago
    img Trending

    Personal savings: A look at how Americans are saving

    Article 3 years ago
    img Trending

    Changing the lens: GDP from the industry viewpoint

    Article 3 years ago
    img Trending

    What is US national income telling us?

    Article 3 years ago

    More from the Economics collection

    • Monetary policy in advanced economies Article3 years ago
    • Balancing payments Article5 years ago
    • In whose interest? Examining the impact of an interest rate hike Article6 years ago
    • Retirees of the future Article3 years ago
    • Personal savings: A look at how Americans are saving Article3 years ago
    • Global Weekly Economic Update Article2 days ago
    Daniel Bachman

    Daniel Bachman

    Senior Manager | Deloitte Services LP

    Dr. Bachman is a senior manager with Deloitte Services LP, in charge of US economic forecasting for Deloitte’s Eminence and Strategy functions. He is an experienced US and international macroeconomic forecaster and modeler. Dr. Bachman came to Deloitte from IHS economics, where he was in charge of IHS’s Center for Forecasting and Modeling. Prior to that, he worked as a forecaster and economic analyst at the US Commerce Department.

    • dbachman@deloitte.com
    • +1 202 306 5576

    Share article highlights

    See something interesting? Simply select text and choose how to share it:

    Email a customized link that shows your highlighted text.
    Copy a customized link that shows your highlighted text.
    Copy your highlighted text.

    Falling interest rates: Puzzles keeping economists awake at night has been saved

    Falling interest rates: Puzzles keeping economists awake at night has been removed

    An Article Titled Falling interest rates: Puzzles keeping economists awake at night already exists in Saved items

    Invalid special characters found 
    Forgot password

    To stay logged in, change your functional cookie settings.

    OR

    Social login not available on Microsoft Edge browser at this time.

    Connect Accounts

    Connect your social accounts

    This is the first time you have logged in with a social network.

    You have previously logged in with a different account. To link your accounts, please re-authenticate.

    Log in with an existing social network:

    To connect with your existing account, please enter your password:

    OR

    Log in with an existing site account:

    To connect with your existing account, please enter your password:

    Forgot password

    Subscribe

    to receive more business insights, analysis, and perspectives from Deloitte Insights
    ✓ Link copied to clipboard
    • Contact us
    • Search jobs
    • Submit RFP
    • Subscribe to Deloitte Insights
    Follow Deloitte Insights:
    Global office directory US office locations
    US-EN Location: United States-English  
    About Deloitte
    • About Deloitte
    • Client stories
    • My Deloitte
    • Deloitte Insights
    • Email subscriptions
    • Press releases
    • Submit RFP
    • US office locations
    • Alumni
    • Global office directory
    • Newsroom
    • Dbriefs webcasts
    • Contact us
    Services
    • Tax
    • Consulting
    • Audit & Assurance
    • Deloitte Private
    • M&A and Restructuring
    • Risk & Financial Advisory
    • AI & Analytics
    • Cloud
    • Diversity, Equity & Inclusion
    Industries
    • Consumer
    • Energy, Resources & Industrials
    • Financial Services
    • Government & Public Services
    • Life Sciences & Health Care
    • Technology, Media & Telecommunications
    Careers
    • Careers
    • Students
    • Experienced Professionals
    • Job Search
    • Life at Deloitte
    • Alumni Relations
    • About Deloitte
    • Terms of Use
    • Privacy
    • Privacy Shield
    • Cookies
    • Cookie Settings
    • Legal Information for Job Seekers
    • Labor Condition Applications
    • Do Not Sell My Personal Information

    © 2023. See Terms of Use for more information.

    Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the "Deloitte" name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.

    Learn more about Deloitte's work for the US Olympic Committee