Accessible Version
New Financial Market Measures of the Neutral Real Rate and Inflation Expectations, Accessible Data
Figure 1. 5−to−10−Year Nominal Forward Rate
The figure plots the 5-to-10-year nominal forward rate from January 1990 to June 2020. The series is plotted at a daily frequency. There is a notable gradual decline in this series throughout the sample, from about 8 percent in January 1990 to about 1 percent in June 2020.
Source: Federal Reserve Bank of New York, Board staff calculations.
Figure 2. 5−to−10−Year−Ahead Real Rate and CPI Inflation Expectations
The figure plots two primary outputs of our model from January 1990 to June 2020. First, the 5-to-10-year ahead expectation of the short-term real rate from our regressions (at a daily frequency). During the 1990s and 2000s prior to the Global Financial Crisis, the expected short-term real interest rate generally stayed within a range from about 1.5 percent to about 2.5 percent. However, since the Global Financial Crisis, it has declined fairly steadily, with particularly sharp declines during the middle of 2019 and during the recent Covid-19 pandemic, during which it has fallen to around 0 percent. Second, the 5-to-10-year ahead expectation of CPI inflation from our regressions (also at a daily frequency). In contrast, the average expected CPI inflation rate declined fairly steadily during the 1990s, from about 4 percent to a little over 2.5 percent. While it has edged down since 2014, it has remained relatively stable during the recent Covid-19 pandemic, ending the sample at 2.2 percent.
Source: Federal Reserve Bank of New York; Wolters Kluwer Legal and Regulatory Solutions U.S.: Blue Chip Economic Indicators and Blue Chip Financial Forecasts; Board staff calculations.
Figure 3. Estimates of the Longer−Run Neutral Real Rate
The figure plots three estimates of the longer-run real neutral rate from January 1990 to June 2020: (1) the 5-to-10-year ahead expectation of the short-term real rate from our regressions, (2) the 5-to-10-year ahead expectation of the short-term real rate from the D’Amico, Kim, and Wei (2018) term structure model; and (3) the difference between the expectation of the federal funds rate and CPI inflation from 6 to 11 calendar years ahead, as reported by the mean respondent to the Blue Chip Financial Forecasts survey. The first two series are plotted at a daily frequency and the third at a semi-annual frequency. All of the measures fall through the sample. However, the regressions more closely match the cyclical variation in the surveys than the term structure model.
Source: Federal Reserve Bank of New York; Wolters Kluwer Legal and Regulatory Solutions U.S.: Blue Chip Economic Indicators and Blue Chip Financial Forecasts; Board staff calculations.
Figure 4. Estimates of the Longer−Run Neutral Real Rate
The figure plots estimates of the longer-run real neutral rate from January 1990 to June 2020. First, the 5-to-10-year ahead expectation of the short-term real rate from our regressions (at a daily frequency). And second, the range and mean of point estimates from six macroeconomic models (at a quarterly frequency). The regressions broadly track the variation in the mean of the macroeconomic model estimates, which decline over the sample. However, the regression-based estimates ends the sample around the bottom end of the range of macroeconomic-model-based estimate.
Source: Federal Reserve Bank of New York; Wolters Kluwer Legal and Regulatory Solutions U.S.: Blue Chip Economic Indicators and Blue Chip Financial Forecasts; Board staff calculations.