As of the latest survey of primary dealers conducted by the Federal Reserve Bank of New York, the median respondent now sees rates settling at around 3% — a tectonic shift in central bank forecasting. In options markets, traders are wagering on rates of around 4% into at least 2026. Market participants do not think rates will stay at their current extremes for longer than anticipated; they now also believe that rates may have to stay moderately high forever — a shift that implies far-reaching consequences for housing affordability, corporate finance and the national debt.
Despite the highest Federal Reserve policy rates in two decades, the US economy grew about 2.5% last year, unemployment remains low, and stocks are near all-time highs, leading many observers to conclude that the economy must have become less interest-rate sensitive — and probably needs permanently high benchmark rates to prevent overheating.
Consider the monumental shift in attitudes in recent months. For the better part of a decade, market economists have generally believed that the longer-run “neutral” Fed policy rate — consistent with low inflation and sustainable growth — was around 2.5%, and that remained the case even after inflation surged in 2021 and 2022. Once inflation had been beaten, economists assumed that policy rates would eventually “normalise” around that 2.5% level. But in 2023, something snapped and economists’ median views drifted up.
