Observing the history since the early 1960s, we have found that nominal GDP is a good starting point for the neutral nominal rate. Using a 2% potential growth rate and the 2% inflation target, we thus end up with 4% as a fair target.
The market is currently pricing very close to our thinking of neutral, with long term rates around 4%. However, if inflation should not return to their 2% target, as several of the Fed members now fear, rates would need to be set in restrictive territory. We agree with the Fed that this is worth keeping in mind, and we still see mostly upside risks to current market pricing. - Nordea
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