Jamie Rush, Tom Orlik and Stephanie Flanders, authors of The Price of Money: A Guide to the Past, Present, and Future of the Natural Rate of Interest, argue that the so-called natural rate of interest, known in economic shorthand as r*, is rising for reasons largely unrelated to decisions made at the Federal Reserve or geopolitical developments such as the Iran conflict. The book was published by Oxford University Press.

The natural rate, explained

The natural rate can be understood as the “Goldilocks” real interest rate: the level at which the economy operates at full employment while inflation remains stable. If the rate is too low, the economy can overheat. If it is too high, economic growth can stall. Central banks attempt to guide market rates toward r*, but they do not determine the natural rate itself. That is shaped by the broader economy.

The book’s empirical model covers 12 advanced economies and projects conditions through 2050. According to the model, r* reached a low of roughly 1.7% in the mid-2010s. The authors forecast that it will rise to approximately 2.8% by the 2030s.

In nominal terms, that projection would imply 10-year Treasury yields settling in a range of 4.5% to 5%.

The distinction between the two figures is important: r* is a real, or inflation-adjusted, rate, while a nominal Treasury yield also reflects inflation and other market factors. The projected yield range is therefore an application of the book’s r* estimate, not a claim that Treasury yields will move in lockstep with it at every point.

Demographics reverse the savings trend

Beginning in the 1980s, baby boomers entered their peak earning and saving years, sending large amounts of capital into the global economy. That increase in savings helped push interest rates steadily lower for decades, contributing to what economists called the “global savings glut.”

The authors say that trend is now reversing. As baby boomers retire, they are drawing down their accumulated savings rather than continuing to add to them. The available pool of capital is therefore shrinking at the same time that demand for capital is increasing.

Public and private debt has also expanded sharply across advanced economies. Together, declining savings and rising borrowing needs create a supply-and-demand squeeze, with more borrowers competing for a smaller pool of available funds. The resulting pressure, the authors argue, is a higher “price of money.”

Their analysis maintains that Federal Reserve rate decisions and geopolitical disruptions are not the primary drivers of long-term borrowing costs. Instead, demographics and debt establish the underlying trend.

Implications of a higher r*

Governments that accumulated debt when interest rates were near zero could face materially higher refinancing costs over the next decade. Corporate borrowing would also become more expensive. Companies that benefited from cheap capital—particularly in technology and real estate, where valuations are sensitive to discount rates—would need to justify their valuations under a different cost-of-capital regime.

Real estate is especially exposed because higher long-term borrowing costs directly affect mortgage rates. Higher mortgage rates can reduce property demand and put pressure on valuations.

The book also addresses the limits of central-bank influence. If demographic aging and debt accumulation are driving r*, the Federal Reserve can affect where market interest rates stand relative to the natural rate, but it cannot directly change r*. That depends on how much the world saves and how much it borrows.

The projections—a 2.8% natural rate and 4.5% to 5% Treasury yields—will ultimately depend on how demographics, productivity and fiscal policy develop across the 12 economies over the next 25 years.