24 Sep Inflation, Real Interest Rates, and the End of Easy Money?
What the Great Financial Crisis and the COVID-1G policy response can teach long-term investors about the regime ahead
For investors who came of age after 2008, today’s real interest rates can feel abnormal. I am increasingly inclined to ask the opposite question: were the extraordinarily low real rates of the post-crisis era the true aberration?
The inflation debate is really a regime debate
I entered the investment profession in 1980, just as the United States was confronting the consequences of the Great Inflation and the Volcker Federal Reserve was forcing a painful reset in the price of money. Over the decades that followed, inflation subsided, nominal and real interest rates trended lower, globalization expanded, and capital became progressively cheaper. That environment shaped the expectations of investors, businesses, homeowners, and governments alike.
The debate in 2026 is therefore larger than whether the next CPI or PCE print comes in a tenth of a percentage point above or below expectations. The more consequential question is whether the United States has moved into a durable regime in which real interest rates, inflation risk, and the cost of capital are structurally higher than they were during the long post-2008 period.
My own concern is not that we are reliving the 1970s. We are not. Nor do I believe that a recession or market collapse is inevitable. The issue is subtler: the fiscal and monetary policy experiments of the last two crises may have changed the economic starting point from which investors now operate. At the same time, persistent federal deficits, heavy public borrowing, deglobalization, energy insecurity, and an extraordinary private-sector capital-spending cycle around artificial intelligence are all competing for savings. The result may be a higher hurdle rate for capital for years to come.
That possibility matters enormously for families whose mandate is not simply to maximize nominal returns in the next twelve months, but to preserve capital and compound purchasing power across generations.
The Great Financial Crisis: ZIRP without an inflation breakout
The Great Financial Crisis provides a useful starting point because it established the monetary-policy playbook that would later be used on a much larger scale during the pandemic.
From a federal-funds rate of 5.25% in 2007, the Federal Reserve cut the policy rate to essentially zero by December 2008. Once conventional rate cuts were exhausted, the Fed turned to forward guidance and large-scale asset purchases. Between late 2008 and 2014, it purchased trillions of dollars of Treasury and agency securities in an effort to push longer-term borrowing costs lower, restore market functioning, and support economic recovery.
This became known as ZIRP – the zero-interest-rate policy – combined with quantitative easing. At the time, many investors feared that the enormous expansion of the Federal Reserve balance sheet would inevitably create runaway inflation. It did not. Inflation remained stubbornly low for much of the following decade.
Why? In my judgment, the answer lies in the nature of the crisis. The 2008 shock was a balance-sheet and banking crisis. Households were deleveraging, banks were repairing capital, mortgage credit was contracting, unemployment was high, and private demand was weak. The transmission mechanism from reserves to spending was impaired. The fiscal response was also much smaller than what followed in 2020: the American Recovery and Reinvestment Act was initially estimated by the Congressional Budget Office to add about $787 billion to deficits over 2009-2019. By contrast, pandemic-era fiscal measures eventually ran into several trillions of dollars.
The post-GFC policy mix therefore created abundant liquidity in the financial system without creating an equivalent surge in household purchasing power relative to the economy’s productive capacity. Asset prices responded strongly. Consumer-price inflation did not.
COVID-19 was a very different experiment
The pandemic was not another 2008. It was a sudden shutdown of productive capacity accompanied by an extraordinary effort to replace lost income and prevent economic collapse.
The Federal Reserve acted with exceptional speed. In March 2020 it returned the federal-funds rate to 0%-0.25%, restarted massive purchases of Treasury and agency mortgage-backed securities, and created emergency lending facilities. By late 2020, the Fed was buying at least $80 billion of Treasuries and $40 billion of agency MBS each month. Its balance sheet ultimately approached $9 trillion.
Fiscal policy was even more extraordinary. CBO estimated that the four major pandemic laws enacted in March and April 2020 alone would add roughly $2.3 trillion to the fiscal 2020 deficit and another $0.6 trillion in 2021. Later legislation added still more. Households received direct payments, unemployment benefits were substantially expanded, businesses received support, and state and local governments were assisted on a scale without modern precedent outside wartime.
The humanitarian and economic logic was understandable. Policymakers were confronting an unknown disease, collapsing employment, frozen credit markets, and the possibility of a depression. In my view, the first objective
– preventing a financial and social catastrophe – was achieved remarkably well.
But the macroeconomic aftermath was very different from the aftermath of 2008. This time the banking system was not the epicenter of the problem. Household balance sheets were supported while the supply side of the economy was constrained by shutdowns, shortages, logistics failures, labor dislocations, semiconductor scarcity, and eventually energy shocks. Demand recovered faster than supply could respond. The result was the classic economic problem of too much nominal purchasing power chasing too few immediately available goods and services.
Research since the pandemic has reinforced the view that the inflation surge was multi-causal. Supply disruptions mattered. Reopening mattered. Energy mattered. Labor-market shifts mattered. But it is increasingly difficult to argue that fiscal and monetary policy played no role. Research from the Federal Reserve Bank of St. Louis, among others, finds that generous fiscal support increased goods demand while industrial production could not adjust quickly enough, contributing to the demand-supply imbalance and inflation.
The lesson is not that the pandemic response was simply a policy mistake. Counterfactual history is too easy. The lesson is that emergency policies appropriate for the first phase of a crisis can become inflationary if they remain highly stimulative after private demand and financial conditions have recovered.
A necessary clarification about Modern Monetary Theory
The policy mix of 2020 and 2021 is often described loosely as Modern Monetary Theory, or MMT. I think that characterization needs precision.
The Federal Reserve did not officially embrace MMT. In fact, Chair Jerome Powell had explicitly rejected one of its most provocative popular interpretations in 2019 – the proposition that deficits do not matter for a country that borrows in its own currency. During the pandemic the Fed continued to describe its actions in terms of its congressional mandate, market functioning, maximum employment, and price stability.
Yet the practical appearance of the policy mix was undeniably MMT-like to many market participants: Congress ran enormous deficits while the central bank held short rates near zero and bought very large quantities of Treasury securities. The Treasury and the Fed remained legally and institutionally separate, but fiscal expansion and monetary accommodation were operating in the same direction at extraordinary scale.
That distinction matters. MMT’s more serious formulations do not claim that a sovereign currency issuer can spend without limit; they identify real productive capacity and inflation as the ultimate constraints. The pandemic experience should therefore be remembered less as proof that MMT was adopted and more as a vivid demonstration of the constraint that ultimately matters: once aggregate nominal demand outruns the economy’s capacity to supply goods and services, inflation becomes the tax that disciplines the experiment.
There was another important policy feature. In 2020 the Federal Reserve adopted flexible average inflation targeting, explicitly indicating that after periods of inflation below 2%, it would tolerate inflation moderately above 2% for some time. That framework was designed for the low-inflation, low-r-star world policymakers believed they inhabited. In hindsight, it may have encouraged patience at precisely the moment the inflation regime was beginning to change. That is not the same as saying the framework caused the inflation surge; it is saying that the Fed was calibrated to fight the last problem – chronically insufficient inflation – when a new problem was emerging.
R-star: perhaps the most important unobservable number in finance
This brings us to r-star, the neutral real rate of interest: the short-term real interest rate consistent, in theory, with an economy operating near its potential and inflation remaining stable. It cannot be observed directly. It must be estimated, and those estimates carry wide uncertainty bands.
Before the pandemic, the Federal Reserve spent years discussing the secular decline in r-star. Chair Powell noted in 2019 that standard estimates had fallen materially over the preceding two decades. Aging demographics, slower trend growth, global savings, demand for safe assets, and low inflation all appeared to be pushing the neutral real rate lower. That decline helped explain why the zero lower bound had become a recurring concern for central banks.
The post-pandemic picture is more complicated. The New York Fed’s Laubach-Williams framework still places r-star well below the levels of the 1960s and 1970s, but recent estimates are above the post-GFC trough. Other Federal Reserve research in 2026 has explored the possibility that a medium-run neutral rate has shifted higher, while emphasizing substantial uncertainty.
I would not build an investment portfolio around a point estimate of r-star. That would be false precision. But directionally, a higher neutral rate is plausible. Persistent government borrowing can raise demand for savings. The AI and data-center buildout requires enormous private capital. Energy infrastructure, defense spending, supply-chain redundancy, and reshoring require capital as well. If productivity improves substantially, that too can raise the return on productive investment and therefore the neutral real rate.
The implication is important. A 4% policy rate is highly restrictive if neutral is 1%. It is far less restrictive if neutral has migrated toward 2% or higher. Likewise, a 5% ten-year Treasury yield means something very different when expected inflation is 4% than when long-run expected inflation is closer to 2%-3%. For investors, the cost of capital must increasingly be analyzed in real terms.
Where we stand in September 2026
The current data support caution, not panic. July PCE inflation was 3.7% year over year and core PCE was 3.3%, still materially above the Fed’s 2% objective. On September 16 the FOMC raised the federal-funds target range by 25 basis points to 3.75%-4.00%. The Fed’s own median projections call for 2026 PCE inflation of 3.7%, core PCE of 3.4%, real GDP growth of 2.3%, and unemployment of 4.1%.
That is not a stagflation forecast. The Fed’s base case remains a soft landing: inflation gradually subsides while growth and employment remain reasonably healthy. I regard that outcome as possible and perhaps even probable if energy pressures ease, productivity remains strong, and inflation expectations remain anchored.
At the same time, the fiscal backdrop is no longer benign. CBO projects a fiscal 2026 deficit of about $1.9 trillion, or 5.8% of GDP, with debt held by the public near 101% of GDP and rising over the next decade. Those numbers do not prove that long-term yields must rise. But they do mean that the Treasury must continually compete for private savings at a scale that was far less important in the low-rate era.
My concern, therefore, is not simply that the Fed may keep rates higher for longer. It is that the market-clearing real rate demanded by savers may itself be higher. If that is true, the 2010s are a poor template for the next decade.
WHAT THIS MEANS FOR THE WAY WE INVEST FAMILY CAPITAL
I do not believe the appropriate response is to retreat from equities. For an intergenerational family, inflation remains one of the most dangerous long-term risks, and ownership of productive businesses remains one of the most reliable ways I know to participate in real economic growth over long periods.
But a higher real-rate world raises the quality threshold. When capital is cheap, weak businesses can survive for surprisingly long periods. When the hurdle rate rises, balance-sheet quality, internally generated cash flow, returns on invested capital, and discipline in capital allocation become more valuable.
Our preference remains broad, low-cost exposure to high-quality U.S. equities, particularly large-cap companies with robust balance sheets, healthy after-tax cash flows, durable competitive positions, and the demonstrated ability to earn returns on equity and invested capital above their cost of capital through different economic regimes. In a world where the risk-free real rate is no longer close to zero, I want the businesses we own to clear a meaningful hurdle rate without depending on perpetual refinancing at artificially cheap money.
I also continue to favor companies and indexes with a record of reliable dividend growth. A dividend is not valuable merely because it is paid. It is valuable when it is supported by recurring free cash flow, sensible payout ratios, and a business capable of raising the payment over time without sacrificing productive reinvestment. For long-term families, the combination of retained earnings, reinvestment, and rising dividends can be a powerful compounding mechanism.
This does not imply abandoning growth companies. Some of the strongest businesses in the economy are growth companies. The distinction I care about is not growth versus value as a marketing category. It is economic quality versus dependence on cheap capital. A company that can reinvest at high incremental returns and finance growth largely from internally generated cash flow is very different from a company whose valuation requires both flawless execution and permanently low discount rates.
The same discipline applies to AI. I want our families to participate in the productivity and earnings opportunities created by artificial intelligence, but I do not want their financial futures to depend on guessing which individual company will win a technological arms race. Broad rule-based indexes provide participation without requiring heroic forecasts.
WHY I REMAIN COMFORTABLE STAYING SHORT IN FIXED INCOME
The other side of our portfolio construction is fixed income. I remain comfortable with our short-duration approach and see little reason to reach aggressively for long duration simply because nominal yields are higher than they were a few years ago.
Our fixed-income allocation is designed primarily to provide income, capital stability, known liquidity, and optionality. We generally barbell that allocation between very short instruments and high-quality maturities extending to roughly four years rather than making a large directional bet on the far end of the yield curve.
That structure gives us several advantages. We earn meaningful current income. We reduce the portfolio’s sensitivity to unexpected increases in long-term real yields. Maturing securities continually return capital that can be reinvested at prevailing rates. And, most importantly, the family retains dry powder when equity markets provide unusually attractive opportunities or when distributions are required.
Optionality has value that does not appear in a conventional yield calculation. A family that has adequate short-duration liquidity is less likely to be forced to sell high-quality equities during a severe decline. I have seen repeatedly over four decades that avoiding forced sales can be more important to long-term compounding than squeezing another fifty basis points of yield from the bond portfolio.
If the Fed ultimately succeeds in bringing inflation down and long rates fall materially, we will have opportunities to reconsider duration. If instead real rates remain elevated or the term premium rises further, our shorter structure will allow us to reinvest without having locked substantial capital into long-duration bonds at the wrong point in the cycle.
RETURN EXPECTATIONS SHOULD BE TEMPERED - BUT NOT ABANDONED
I continue to believe investors should temper expectations for the next several years. Elevated equity valuations and higher real interest rates are a less forgiving combination than the valuations and discount rates that prevailed for much of the 2010s.
I am deliberately not putting a precise three- or five-year return forecast on the SCP 500. Valuation is useful for framing long-term expected returns; it is notoriously poor at timing markets over short windows. Strong earnings growth, productivity, and innovation can sustain returns even when discount rates are high. Conversely, disappointing earnings can make expensive markets vulnerable very quickly.
The more defensible conclusion is that future equity returns may have to be earned the old-fashioned way: through revenue growth, margin discipline, productive reinvestment, dividends, and genuine increases in corporate cash flows rather than through endless expansion of valuation multiples.
For families whose capital is truly intergenerational, that is not a reason for pessimism. It is a reason for selectivity, diversification, patience, and realistic expectations.
The lesson from two crises
The Great Financial Crisis taught policymakers that zero rates and quantitative easing could stabilize a broken financial system without automatically producing consumer-price inflation. The pandemic taught a different lesson: when massive fiscal transfers and exceptionally easy monetary policy meet constrained productive capacity, inflation can become the binding constraint much faster than expected.
Neither lesson should be simplified into an ideology. ZIRP was not inherently inflationary in 2009. Pandemic support was not inherently irresponsible in March 2020. MMT was not formally adopted by the Federal Reserve. And r-star cannot be measured with the precision of a Treasury yield on a screen.
But taken together, the last eighteen years should make investors humble about extrapolating any monetary regime indefinitely.
My working assumption today is that the United States may be entering a period of structurally higher real interest rates than prevailed after 2008. That assumption could prove wrong. If inflation falls decisively, fiscal pressures moderate, and the supply of global savings again overwhelms demand for capital, real rates could decline substantially.
But we do not need to predict that outcome correctly to manage family capital intelligently. We can own productive businesses with strong balance sheets and high returns on capital. We can insist on real cash flows rather than stories. We can favor reliable dividend compounders. We can keep fixed income short enough to preserve liquidity and optionality. We can avoid excessive leverage. And we can remain patient when markets inevitably become volatile.
That is the discipline I believe serves intergenerational wealth best. Monetary regimes change. Sound balance sheets, productive assets, liquidity, and time remain remarkably durable advantages.
Current policy snapshot (as of September 20, 2026)
| Measure | Latest | Interpretation |
|---|---|---|
| PCE inflation, July 2026 | 3.7% y/y | Still above the Fed’s 2% objective |
| Core PCE, July 2026 | 3.3% y/y | Underlying inflation remains elevated |
| Federal-funds target, Sept. 16 | 3.75%-4.00% | Policy has moved tighter again |
| Fed median 2026 GDP growth | 2.3% | Soft-landing baseline, not stagflation |
| Fed median 2026 unemployment | 4.1% | Labor market remains resilient |
| CBO FY2026 deficit | $1.91T / 5.8% GDP | Heavy ongoing demand for private savings |
| Debt held by public, FY2026 | ~101% GDP | Large and projected to rise |
Selected sources and further reading
- Federal Reserve, September 16, 2026 FOMC statement
- Federal Reserve, September 2026 Summary of Economic Projections
- Bureau of Economic Analysis, Personal Income and Outlays, July 2026
- Federal Reserve, Timeline of Balance Sheet Policies
- Federal Reserve, A Brief Illustrated History of the Federal Reserve’s Balance Sheet (2026)
- Federal Reserve, 2020 Statement on Longer-Run Goals and Monetary Policy Strategy
- Federal Reserve Bank of New York, Measuring the Natural Rate of Interest (r-star)
- Federal Reserve Bank of San Francisco, Assessing a Medium-Run Natural Rate of Interest (August 2026)
- Congressional Budget Office, The Budget and Economic Outlook: 2026 to 2036
- Congressional Budget Office, The Effects of Pandemic-Related Legislation on Output (2020)
- Congressional Budget Office, American Recovery and Reinvestment Act conference estimate (2009)
- Federal Reserve Bank of St. Louis, Demand-Supply Imbalance during COVID-19: The Role of Fiscal Policy
- Federal Reserve Bank of St. Louis, The COVID-19 Pandemic and Inflation: Lessons from Major US Wars
