Warning: members of the public are being contacted by people claiming to work for AXA Investment Managers UK Limited.  Find out more information and what to do by clicking here.

Investment Institute
Viewpoint Chief Economist


  • 26 April 2021 (7 min read)

Key points

We think there is a case for a higher level of the natural interest rate post-pandemic in the US.

The natural interest rate – the real rate consistent with an economy at full capacity and stable inflation – has been declining over the last two decades, starkly reducing the capacity of monetary policy to steer the cycle and deliver price stability without resorting to unconventional instruments which often end up raising political or financial stability issues. Although high uncertainty prevails on these matters and we want to be cautious, we think there is a plausible case for some rebound in this equilibrium rate (r-star, or r*) post-pandemic in the US.

The drivers of r* are trend growth, which itself depends on productivity gains and the changes in working-age population, as well as the preference for saving, particularly in the form of “safe assets”. While demographic developments are unlikely to help, the jury is out on productivity post-covid, with the combination of new working practices and public investment programs focusing on infrastructure and fundamental research. “Scarring” could be limited in the US because of the speed of the recovery. True, productivity trends have been disappointing for two decades and we should remain cautious, but it just might not persist.

Where we think we can be more conclusive is on a change in the supply and demand of safe assets – in practice US public debt. Beyond the recent announcements by the US administration, the “pendulum has shifted” on public expenditure. In front of this higher issuance, we believe the “safe asset glut” from emerging countries recycling their current account surpluses has faded – provided no emerging market crisis eventually triggers another massive accumulation of official reserves.

Moreover, while the decline in r* pre-dates 2008, it has been significantly magnified by the Great Financial Crisis (GFC). The need to deal with accumulated debt in the private sector made spending less sensitive to lower interest rates. The current crisis is very different. US households are going to exit from the pandemic with much lower debt than during the GFC. They may be able to withstand a higher level of effective interest rates without triggering a deflationary slump.

We don’t posit a massive rise in r-star, given the weight of the demographic issues, but at the same time the mere possibility that the demand/supply configuration on the US bond market changes on trend should be taken into consideration by the market. This would be consistent with US effective real rates rising.

Download the full insight
Download article (475.02 KB)

Related Articles

Viewpoint Chief Economist

One Week at a Time

Viewpoint Chief Economist

Taking the Plunge

Viewpoint Chief Economist

The (welcome) Return of Boring

    Not for Retail distribution

    This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

    This promotional communication does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee that forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice.

    The products or strategies discussed in this document may not be registered nor available in your jurisdiction. Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors.

    Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding.

    Risk Warning

    The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.