What’s happening to interest rates—and will they ever fall back to the unusually low levels seen after the 2008 financial crisis?
Few economists have thought more deeply about those questions than Kenneth Rogoff, Boas professor of economics and former chief economist of the International Monetary Fund. Rogoff is widely known for his research on global financial crises and public debt, and he has advised policymakers around the world.
In his view, a combination of structural forces—including high national debt, ongoing geopolitical tensions such as the wars in Iran and Gaza, and rising investment demands from technologies like artificial intelligence—are likely to keep borrowing costs elevated for the foreseeable future.
In this interview, edited for length and clarity, Rogoff discusses how central banks play a crucial role in keeping inflation in check, and why their independence matters when political and economic pressures pull in different directions.
- How long might high interest rates last, and what does that mean for everyday borrowers?
One of the first things any young person who first takes out a car loan, a mortgage, or a student loan will quickly learn is that the interest rate you have to pay matters a lot for monthly payments. Unfortunately, the ultra-low interest rates that prevailed in the 2010s up through the pandemic years were a sharp deviation from historical norm and although they could come back, don’t hold your breath. Long-term mortgage rates (e.g., for 15-year and 30-year [loans]) are not likely to come down much anytime soon—and could easily go up.
Although some of factors that held down rates are still in play, many forces have pushed them up. These include very high public and private debt levels, a huge thirst for investment funds to finance AI (e.g., data centers), populist pressures to cut taxes and raise spending, trade and geopolitical fragmentation, and a glaring need to increase military spending after years of decline. Most of these factors are hitting large economies across the world, not just the United States.
- How do geopolitical events like wars affect interest rates?
Wars almost invariably put upward pressure on interest rates, mainly because government spending has to rise sharply, which soaks up savings. Also, as the government tries to place more and more debt with investors, they typically demand higher interest rates. That’s to compensate them for having to absorb so much, and because they may fear the government could turn to inflation to ease the burden of paying the debt, in effect financing part of the debt by printing money instead of using taxes.
Of course, the scale of the spending needed matters a lot, and the true cost of the Iran war could be close to a trillion dollars. The closing of the Strait of Hormuz also has significantly pushed up inflation by cutting off perhaps 20 percent of the world’s oil supply, as well as a number of other key products including fertilizers and helium (which is used in making semi-conductors). The resulting shortages are another factor pushing up long-term interest rates, since investors need to be compensated for the fact their money will be buying less when it gets paid back in the future.
- Should people expect inflation to keep rising?
Inflation has been above the Federal Reserve’s target of two percent for over five years now, and between the effects of the war and delayed effects of the 2025 tariff increases, it is likely to remain above target for another one to two years, at a minimum. There is a material risk that it continues throughout the decade, especially if expectations of elevated inflation become ingrained. In principle, the Federal Reserve can prevent this from happening by keeping interest rates at a sufficiently high level so as to restrain demand for housing, autos, durable goods, investment, etc., but this will take considerable fortitude in the face of what is likely to be blistering criticism from politicians who will want to blame the Fed for any slowdown in the economy that might occur.
- Why is central bank independence important , especially now?
Politicians are often facing elections and other short-term pressures, and cutting short-term interest rates can give the economy a temporary boost even if it means pain over the long-run. Having an independent central bank is a device for committing not to do this.
It is precisely in situations like [the one our economy faces now] that central bank independence is crucial for taming inflation and keeping long-term interest rates from rising even more. Although many people think the Federal Reserve controls all interest rates and can bring them down whenever it chooses, it only controls the very short-term interest rate. Longer-term interest rates are market determined. If investors believe the Fed has it wrong and is lowering short-term interest rates too much, long-term rates will rise, not fall, both to compensate investors for inflation, and because investors anticipate the Fed will have to eventually do a 180 and raise short-term interest rates sharply in order to tame the inflation that it has made worse.
- What do you think are the most likely scenarios for interest rates over the next few years?
Until recently, a surprising majority of economists had wrongly convinced themselves that interest rates would remain very low no matter what. Today, however, interest rates costs are the second-largest item in the federal budget. Within a few years, it will be first, according to the Congressional Budget Office.
There is expected to be some slight drop in short-term rates over the next couple years, but longer-term rates, the ones that really matter for mortgages and car loans, are expected to remain high. Of course, if there is a major recession, then interest rates could significantly fall, but probably not to the level of the 2010s.
