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Investing.com -- William Blair says this year’s Jackson Hole Symposium provided more than just signals from Federal Reserve Chair Jerome Powell, who appeared to close the door on the “ill-fated flexible average inflation target.”
It also featured research on the long-term drivers of the real neutral rate of interest, or r-star, a measure William Blair calls “the most important interest rate across the domestic economy and abroad.”
The paper presented at the conference, titled The Race Between Asset Supply and Asset Demand, argued that interest rates reflect the balance between how many assets households and foreigners want to hold and how much government debt, physical capital, and corporate wealth is supplied.
“Quite simply, if the demand is greater than the available supply, interest rates fall… and if the supply is greater than the current demand, then yields have to increase,” William Blair said.
William Blair said that according to the authors, “demand since 1950 has increased by 415% of GDP,” compared with a 31% increase in supply, helping drive the structural decline in interest rates.
Demographic shifts, particularly an aging population and rising wealth concentration, are said to have pushed up demand, while government borrowing and private wealth growth have boosted supply.
Looking ahead, the paper projects that asset demand will rise by another 200% of GDP by 2100, while government debt could reach 250% of GDP.
Even so, William Blair noted, “demand is likely to continue winning the race against supply,” keeping r-star low.
One major uncertainty is productivity, according to the firm. William Blair highlighted that weak productivity shaved 118 basis points off rates over the past 75 years.
But with artificial intelligence promising a “great leap forward,” stronger productivity growth could lift r-star and global interest rates, reshaping debt dynamics and asset valuations.