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Where US interest rate ends depends on China
Date:11.21.2023 Author:Guo Kai - CF40 Institute

Abstract: As the Fed's rate hiking draws to a close, it may be necessary to have a basic view of where US interest rate may end. The final resting place for US interest rate refers to a level at which the nominal interest rate on long-term US treasuries will be when US economic growth and inflation return to a relatively stable state.

From a longer-term perspective, there are three determinants for US nominal interest rate, namely, steady-state US growth, inflation, and the balance between savings and investment. The marginal effects of changes in growth and inflation on the steady-state nominal interest rate are rather limited. The savings-investment balance may be a more critical factor in determining the marginal change in steady-state interest rates.

To understand US saving-investment balance requires a global perspective. The US experienced the Greenspan’s Dilemma in 2004-06, for which Ben Bernanke's Global Savings Glut hypothesis provides a coherent explanation. More than a decade later, the impact of China's economic changes on the United States has increased significantly compared with the situation around 2008.

So we may come to a conclusion that the final resting place for US interest rate is likely to be determined by China. If China’s savings rise relative to investment in the future, its external surplus remains high and domestic interest rate tends to decline, the steady-state interest rate in the United States as a whole will not be higher than that before 2020. If

China’s savings and investment become more balanced, the steady-state interest rate in the United States as a whole will not be lower than that before 2020