Why the Price of Money Surged in the Last Six Years

SPEAKER_2 (0:02)

Bloomberg Audio Studios, podcasts, radio, news.

Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe.

Joe Weisenthal (0:24)

Yeah, yes.

Tracy Alloway (0:25)

Recently, recently, Stephen Myron, who is chair of the Council of Economic Advisors and also the newly confirmed Fed board member, he made his first public speech since joining the Central Bank. And do you know what it was about?

Joe Weisenthal (0:40)

I do, but go on.

Tracy Alloway (0:41)

The neutral rate, the natural rate of interest. Our star.

Joe Weisenthal (0:45)

Yes.

Tracy Alloway (0:46)

Basically all about our star, which is like pretty significant for his first speech.

Joe Weisenthal (0:50)

I mean, to me, this has come up on a bunch of episodes lately. To me, this is the multi-trillion dollar question, which is we're recording the September 24th, 2025 Why are long-term rates so much higher? Why does the market perceive that rates will have to be so much higher in order for the Fed to hit its inflation goals than the market perceived in 2019? What changed in the last six years or five years or whatever?

Tracy Alloway (1:14)

Well, also, I mean, R-Star has always been something of a controversial idea, and people criticize it for being this unobservable thing. It's a hypothetical estimate that's extracted from all this different stuff, like savings and spending and productivity and demographics, investment, you can go on and on and on.

Joe Weisenthal (1:33)

Climate, immigration.

Tracy Alloway (1:34)

Yeah, exactly. But I think R-Star is probably going to get even more controversial or perhaps more under the spotlight is a way of putting it, given that people like Myron in his speech, where he was arguing that the natural rate of interest should be zero right now, which is very, very different than other sort of normal estimates out there, which has the natural rate of interest at 3.3 or 3.9%, something like that. And so, if you think the neutral rate of interest is a lot lower, then you would assume that the Fed should be loosening more. And conversely, if you think R star is high, which a lot of people have argued in recent years, then you would argue that interest rates don't look that restrictive at the moment.

Joe Weisenthal (2:22)

Totally.

Tracy Alloway (2:22)

So we should clearly talk more about this. And we've actually never done a specific episode just on the neutral rate.

Joe Weisenthal (2:28)

So I'll just say two things. I'm probably something of an R star truther in the specific sense that I doubt, like, okay, everyone agrees it's like, quote, unobservable, et cetera. But I doubt that there is actually some rate that will magically bring the economy into balance if we knew what it was. That doesn't mean I don't find this to be a conceptually useful conversation.

Tracy Alloway (2:49)

And yet you don't believe in the term premium.

Joe Weisenthal (2:52)

I don't really believe in any of this stuff. No, that's not true. I am very interested in setting aside whether something could theoretically be observed, whether one number could bring everything into balance, all of these things, setting aside that question. Something has changed in the underlying economy. If you want to call that a neutral rate of interest, I guess I'm totally fine with that. But something's changed and I want to know what it is. But more importantly, I want to know why.

Tracy Alloway (3:18)

All right. Well, we have the perfect guess. We're going to be speaking with Tom Orlik, who is, of course, chief economist at Bloomberg Economics. He's been on a number of times before. Jamie Rush, director of global economics at Bloomberg Economics, and together with Stephanie Flanders, who is the head of Bloomberg Economics, and also the host of the Trumponomics podcast, have written a book all about the neutral rate of interest.

Joe Weisenthal (3:44)

A whole book about it.

Tracy Alloway (3:45)

Yeah, called The Price of Money, A Guide to the Past, Present, and Future of the Natural Rate of Interest.

Joe Weisenthal (3:51)

Amazing. I'm really excited.

Tracy Alloway (3:52)

Let's get started. Tom and Jamie, thank you so much for coming on Odd Lots.

Tom Orlik (3:56)

Great to be here. Thanks, Tracy. Thanks, Jay.

Jamie Rush (3:59)

Thanks for having us.

Tracy Alloway (4:00)

First of all, congratulations on the new book. And I got to say, it's kind of ballsy to tackle this concept that a lot of people don't believe in, excluding Joe. And, you know, that tends to generate a lot of criticism. And maybe it's even ballsy to publish your own model so that everyone can see what the estimates actually are. I mean that as a genuine compliment, but why a book on the neutral rate? What prompted it?